by Craig Hatkoff, Rabbi Irwin Kula with Professor Clayton M. Christensen
(This is a previously unpublished article from August 2010 being released in memory of Clay’s passing in light of the emerging COVID19 crisis.)
When Risk Goes Asymmetric Strange Things Can Happen
About the culture at his previous gold trading firm, J. Aron, subsequently purchased by Goldman Sachs, former Goldman CEO Lloyd Blankfein, notoriously quipped, “We didn’t have the word ‘client’ or ‘customer’ at the old J. Aron. We had counterparties…” That quote in our minds serves as a crease in time. Even as a joke, this little zinger sums up one of the great issues confronting capitalism: structural, asymmetric risk where information systems are dangerously skewed against the less informed. While not illegal, there is something borderline immoral or at least a bit creepy about the unchallenged feeder system between Goldman Sachs and the rest of the world’s power regimes populated with former high ranking Goldman alums. To dispel any notions of Pollyannaism, bacteria, rarely admired for is aesthetic qualities, is admittedly an essential part of any healthy, self-correcting systems in dynamic equilibrium. Try making yogurt without bacteria! Matt Taibbi’s epic article in Rolling Stone permanently etched the moniker for Goldman Sach as a giant vampire squid, sucking the blood out of America, Americans, and any other organism living or dead, into the world’s psyche. Let’s just face it, The Goldman Gangs are the smartest and best-informed guys/gals in the room. Just the way it is. Until…
But a larger storm arises in the midst of any good ole financial crisis, where the rich get richer for being smarter and better informed creating structural asymmetry where moral hazard, personal accountability, and outright humanity. When there is no face to a crisis it is hard to foment a communal empathic response. On July 25, 1985, Rock Hudson’s press secretary publicly confirmed he was suffering from HIV/AIDS; two months later he was dead. The announcement itself shook America out of its faceless indifference to a brewing storm: “Oh no! Rock Hudson has AIDS????” fretted an awakened citizenry. The AIDs epidemic was now real.
So far while many high profile celebs have contracted the COVID19 virus none have succumbed and emerges as a fatality statistic. This too shall change at some point. The demise of Tom Hanks, Idris Elba, Prince Charles or other similarly-ranked notables would quickly put a face on this novel coronavirus. This would become a psychological tipping point. One need only look to Kobe Bryant’s demise which led to a national depression and state of mourning.
Congressional testimony can be a hellish experience for bank titans. In the aftermath of 2008 financial crisis, Goldman’s Blankfein gave a few bucks at the office after his Abacus went awry but he could do the math in his head that $500 million was a spit in the bucket to get back to the business of trying to wipe the calamari omelet off the firm’s face. J.P. Morgan Chase’s Jamie Diamond emerged relatively unscathed but feeling like a bride betrayed left standing at the altar as a once-presumptive Secretary of the Treasury before the bar was lower to admit minors.
Yet another lesson should not be forgotten from the Grand Overlord of finance and eponymous founder of the House of Morgan; J. P. Morgan himself barely survived his congressional testimony on the Panic of 1907. Perhaps apocryphal, some historians have suggested that the stress from his Pujo Committee testimony (effectively ending the “money trust”) did in the already-ailing bulbous-nosed banker just three months after his appearance. Morgan had served as the world’s lender of last resort long enough and was replaced by a new lender of last resort: the Federal Reserve. Morgan had financed much more than just wars—he financed just about everything including unjust wars, banks, railroads, steel mills, and yachts. Yet throughout his illustrious career, one principle was inviolate: character and trust matter. Consider Morgan’s famous exchange with Congressman Untermyer at the congressional hearings:
Congressman Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Congressman Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it … a man I do not trust could not get money from me on all the bonds in Christendom.
And while character determines trust so do consequences. To paraphrase Sam Johnson: Nothing focuses the mind like a hanging.
So what roles do character, trust and consequences (the cauldron of morality) in the amoral framework and underpinnings of capitalism purportedly guided by self-interest, rational behavior and an invisible hand? Remove consequences, trust, and character from the traditional banking relationship between borrowers and lenders and market behavior has all the predictability of Brownian motion. Examining what happens when borrowers and lenders become decoupled from the risk of loss of capital through financial prestidigitation (aka financial innovation) could provide a provocative clue of what might happen when traditional combatants are also decoupled from the risk of loss. A successful suicide bomber and death go hand-in-hand. But a predator drone neatly eliminates the honor quotient inherent in hand-to-hand combat. The risk relationship becomes inversely asymmetric and alters the nature of warfare itself.
As well he should, William Blake had a healthy fear of tigers, whose unsurpassed predatory skills had few, if any, rivals. He certainly had a way with words but perhaps was a bit of a closet military strategist. Remember the famous scene in the coming-of-nuclear-age film War Games, where WOPR (War Operation Plan Response), a slightly schizophrenic military uber-computer (and close relative to HAL from Kubrick’s 2001: Space Odyssey) has a truly senior moment and calculates that any nuclear scenario is completely unwinnable. A frustrated WOPR blows a few fuses and whistles ultimately determining the only way to win is not to play; WOPR entreaties a peach-fuzzed Matthew Broderick with the classic “how about a nice game of chess?”
The lethal weapons of yesteryears’ military-industrial complex have simply too big to succeed resulting in deterrence as the only practical value. Prophetically, War Games serves as a cautionary tale; today our most sophisticated aerial weapons and delivery systems are also over-powered, over-designed and over budget. Yet the UAV Predator Drone and its relatives are a stunningly disruptive military innovation that is a fraction of the cost; while a $4 million Predator, clearly cheaper and inferior to the $350 million F-22 is still good enough to get the job done: taking out troublesome non-state actors and other evil-doers around the globe. Aquinas in Summa Theologica actual coins the phrase evil-doers in his exegesis on Just Wars. The drone, not likely contemplated by Aquinas (who was no William of Ockham), is a construct of more modern, radical thinking. Like the zany world of quantum physics and its wave-particle duality, disruptive innovation theory creates a paradoxymoron: less is more.
Fast forward 25 years: meet the Volker Rule 2.0 for military engagement. Hopefully, the oversight, safeguards, and regulations are more effective than our rating agencies and oil rig regulators. Now apply a fractured corollary to the Volker Rule (affectionately recapitulated as Volker Rule 2.0) to our arsenal of high-tech military technologies and massively damaging weapon systems: by and large, they are simply “too big to succeed.” The capabilities of these feats of engineering supremacy and modern military miracle weapon systems have far outstripped the required response and resources to combat the true twenty-first-century threats: non-state actors.
Now from the secluded safety of CENTCOM trailers outside Las Vegas at Nellis AFB, pilots in decal-decorated flight suits sit in front of Sony Play Station-like equipment, joysticks in hand, and take-out terrorists half-way around the world with. The drone’s function is similar to a suicide bomber yet the drone pilot’s persona is antithetical to that of a successful suicide bomber who faces asymmetrical assured personal destruction (or at least a re-arrangement of genitalia for those less successful). A drone pilot is an exact inverse: enjoying asymmetric personal risk i.e. no risk at all—at least physically. Yes, there is the possibility of post-traumatic stress, but bodily harm is removed from the equation unless the pilot accidentally slips on the step or acquires a nasty case of carpal tunnel syndrome. Joysticks do create an unavoidable occupational hazard. Who can forget the searing imagery of Slim Pickens in Dr. Strangelove personally delivering rodeo-style Fat Boy and Little Man’s ancestor to its targeted destination on a nuclear bucking bronco; now that was honorable!
The drone is a perfect, but not the only, example of the infrequent disruptive military innovation: an intentionally inferior, cheaper, less complicated product that is good enough to get the job done.
Other disruptive military innovations have distanced the combatants’ risk but not eliminated entirely. The inspiration for the Hundred Years War was the late 13th-century disruptive innovation known as the longbow. With the dramatically increased range of these inexpensive bronze-penetrating missiles, the personal risk goal line was moved back a couple of hundred yards as English archers could now pierce the armor of French cavalry with their sky-blackening “rain of death” putting an end to the monopoly on fear where the French cavalry could literally steamroll opposing forces who were no match.
But shock-mounted combat itself was enabled by an earlier disruptive military innovation–the stirrup–thought to have been invented as far back as 2500 B.C. This one little innovation —a strap of leather or forged metal that could secure the rider to his steed– created the equivalent of a modern-day tank. The horse and armor were not disruptive innovations themselves but this single inexpensive component of innovation, the stirrup, would knit together a complex linkage of capabilities enabling France to become complacent in its need for disruptive military innovation. Sustaining innovations—better, stronger armor, jousting tournaments, a hinge or metallic do-hickey here or there. But the invention of the longbow by the English would transform a smaller, poorer nation into a category killer; the raw trajectory power of this simple weapon could take out a knight and a horse in one shot. A nation one fifth its size decimated the French with this incredibly less complicated weapon during the Hundred Years War.
The reach of the longbow doubled the efficacy and power of the conventional bow and ended the monopoly of shock-mounted combat that debatably created the need for the feudal system itself: horses, armored knights were an expensive proposition and economic evolution was needed to feed the beast. Yet the product and the process of implementing the longbow strategy were inextricably linked. All able-bodied Englishmen were required to practice archery on weekends if we can believe Froissart’s account, and no child was left behind. Perhaps our national education system can take a page on working weekends to remain competitive in the global arena of economic warrior nation-states.
But today’s pesky, invisible non-state warriors are not likely to show up at a modern-day equivalent of the Peace of Westphalia–even if we could figure out who to invite. Westphalia was the recognition that gunpowder and guns would result in mutually assured destruction of Protestant and Catholic alike. After all what’s the big deal about Protestants and Catholics getting along? It was really economics and raison d’etat, not religious ideology, that was at the root of the struggle and balance of power politics. Cardinal Richelieu had no problem backing Protestant forces when it served the interests of France. Nor did the flip-flopping Protestant-turned Catholic Henry IV who said, “Paris is well worth a mass.” And the religiously checker-boarded Valtellines and Grison valley may have had more to do with Pope Urban VIII throwing his friend and beneficiary Galileo to the Inquisition than a disagreement between science and religion., Most scientist today understand Galileo’s Copernican proofs were rubbish as did the Jesuits at St. Ignatius’ Collegio Romano at the time.
Shortly after September 11th, an Army four-star general was asked at a private lunch: how can we end terrorism? He responded. “The military can’t end terrorism. We can just kill terrorists. We will track ‘em down one by one. Knock on their door. Drag ‘em outside and kill ‘em. Put a bullet in their head and go knock on the next door. Ending terrorism? That’s not our job. That is up to you.”
In 2002 things suddenly changed by the deployment of a truly disruptive military innovation, a modern-day longbow that quietly arrived in the scene: The Predator Drone. But unlike the longbow that pushed the combatants’ danger back a few hundred, the drone would push it back halfway around the world. No more of that messy business of knocking on doors; we were now technically able with low-end performance to deliver colonoscopies to would-be evil-doers without them even knowing. Drones are not visible cruising at 15,000 feet, no rattle, no hum. Just a hellfire missile up the butt.
According to the recent U.N. Special Rapporteur’s Report, in April 2002 the Russians armed forces took out “rebel warlord” Omar bin al Khattab in Chechnya. Then in November 2002 alleged al Qaeda leader Ali Qaed Senyan al-Harithi and five other men in Yemen were vaporized reportedly by a CIA-operated Predator drone using a Hellfire missile.
The efficacy of the drone as a disruptive innovation was captured in part by Captain Terry Pierce in 2005 in his book on disruptive military technologies. Pierce offers a glimpse as to the benefits as well as the difficulties associated of implementing wrenching change by resisting stakeholders, both inside and outside of the military. Civilians and maverick officers play a critical role in innovation but only under certain very limited circumstances. Disruptive innovations are scary business if you are a career military man, particularly during peaceful periods.
But September 11th changed things dramatically. It was a “crease in time” according to the same four-star. Today Defense Secretary Robert Gates seems to get the need for disruptive military innovation; Gates has urged his weapons buyers to rush out “75% percent solutions over a period of months” rather than waiting for ‘gold-plated’ solutions”. The Predator drone and its unmanned relatives seem to fill that order; it is estimated that nearly 1/3 of the drone fleet has crashed. But at $4 million a pop you can lose a lot of drones and still beat losing one F-22. The math is pretty straight forward. As Voltaire said: perfection is the enemy of the good. Or, as we say in the parlance of disruptive innovation: the good enough!
In an influential 1998 manifesto-styled essay-metaphor on the open source movement (The Cathedral and the Bazaar) Eric Raymond offers an off-handed second derivative yet provocative observation: “distributed problems require distributed solutions”. Drones may be the ultimate distributed military solution for a clearly distributed problem—non-state actors. But the risks and issues are great. The recent U.N. report lashes out against “targeted killing” and is not amused by the joy-stick nature of the new War Games.
When combatants are completely removed from risk of injury something very strange can happen. Like the sub-prime crisis and related contagion where CDOs and credit default swaps decoupled bankers and mortgage brokers from owning any risk, behavior becomes very distorted. The sanctity of the borrower-lender relationship breaks down. Alignment and incentive as the time tested governors of free-markets also breaks down. Amoral if not immoral behavior of the rating agencies further exacerbates the systemic failure as investors, CEOs and regulators were lulled into a sense of complacency like the French cavalry. How can something go from AAA to a total loss overnight? How could Alan Greenspan have been so wrong about free markets and rational behavior by market participants who had every incentive to self-regulate, certainly at the margins of three standard deviations? But when the Volker Rule confirmed that “too big to fail” was not an option, a terrifying realization became apparent: moral hazard where “heads I win, tails you lose” behavior was acknowledged as truly risky business.
Our Volker Rule 2.0 reveals a paradox: our military might be too big to succeed. Cheaper, inferior weapons like drones that are good enough to get the job done might be the answer. But we should proceed with great caution. The decision to invade Iraq was subject to the Pottery Barn principle of “you break it, you own it”. When secluded combatants no longer own the risk, like bankers who no longer own the risk, bad behavior is hard to manage.
As a thought experiment just imagine a drone pilot securely situated in Las Vegas sees Osama Bin Laden in his sights, perhaps somewhere in Iran. And just imagine the unspoken national interest is best served by the current containment rather than Bin Laden’s capture where we would face a lengthy trial and possible execution. One click of the joy stick and a Hellfire Martyr-Maker hits its target and earns legendary status for the gamer who took out OBL. Remember that the chain of command for a drone is not exactly like dropping a nuclear weapon. Rumor has it Hollywood is feverishly working on War Games III: Attack of the Drones coming to a theater near you. Rent before you buy.
Oh, by the way, just wait until our non-state adversaries assemble their own fleet of predator drones operated by a stripped-down free twitter app currently under development. The good news: the app, with full command and control features, will undoubtedly be priced at $3.99. Thank you Steve Jobs.
