A Decade Trip from Y2K to why it Cracked

A Decade Trip from Y2K to why it Cracked

27^th December 2009

The Malta Independent on Sunday

Alfred Mifsud

 At this time 10 years ago, we were holding our breath as if the world could end at the turn of the millennium. Not only was it an event no living creature had experienced before, but we were petrified by the risk that computers and IT systems would crash through their inability to handle the millennium date change

Remember the Y2k scare? When everything went smoothly, the simple truth emerged over the course of the decade about to end: we should be much more scared about the risks we do not see than the risks we can see and prepare for. In Donald Rumsfeld terms: we should beware known unknowns and unknown unknowns rather than the known knowns.

This time a decade ago, the Y2k risk everybody was seeing proved unreal, but the risk from international terrorism that very few were observing proved very real indeed. Today we know that Al Qaeda, a largely unknown organisation 10 years ago, was seriously preparing for a major international terrorism event to hit at the turn of the century. This did not happen, as the plan had to be postponed for better preparation, but when it happened on 9/11 in 2001, the world could not believe how the nerve centres of US capitalism and political system were being attacked by a shadow enemy and broadcast live on prime TV.

9/11 was the event that defined this first decade of the third millennium. It was the cause of two international wars, which brought untold hardship and turmoil that is still rumbling on. The Iraq war is winding down, but the new unstable reality it brought is still evident. The war in Afghanistan is still to be won or lost and, as did 9/11, is showing the severe limitations of the military might of a superpower against insurrection forces that seemingly have limitless resources of suicide terrorists. How can one fight a suicide terrorist with a billion dollar nuclear arms programme?

This time a decade ago, the financial markets were blowing up the technology bubble that eventually peaked in March 2000 and blew up soon after. Again, this was a case of beware the risks hidden by the irrational exuberance or the misplaced euphoria. Internet was the new thing and any company that could put ‘dot com’ behind its name started commanding crazy premiums from investors misguidedly supposing that, at the flick of a switch, we would all change our habits and start procuring our needs over the web.

Ten years later we know that shopping over the web has been popularised and is increasing in volume, as most offices and residences are now wired with generous bandwidth. But old habits die hard, and the new habits sit alongside the traditional experience of shopping from the mall. It is true that virtual vendors like Amazon and Ebay are now household names, but it is not as if malls have closed down.

Over the last decade, new brands have been created that are now integral parts of our everyday parlance. You would have understood nothing 10 years ago if I asked you to Google in search of some information you need. Google, Facebook, Youtube and a multitude of social networking sites are now an integral part of the way we live. My 11-year-old daughter thinks that they have been here since the Ice Age.

At the end of the decade, rather than at Y2k, we are scratching our heads asking how and why it cracked, “it” being the international financial system. Who would have believed, 10 years ago, that we could see financial giants like Citigroup, Bank of America, Royal Bank of Scotland, Lloyds Bank, Hypo Real Estate, Fortis, Commerzbank and others humbled and needing government-sponsored rescue packages to stay afloat, while traditional investment banking names such as Bear Stearns and Lehman Brothers would be wiped out by the turbulence?

Again, this was a case of beware the risks that you do not see. All these banks employed armies of risk managers who should have been on their guard to scan the horizon against all sort of risks. As one internal bank report said, these risk managers were counting the grains of sand on the beach but totally blind to the tsunami that was coming in.

It cracked because it was built on the false premise that the spread of risk from the primary originators of mortgages to several layers of secondary investors who bought the sliced and diced risk relying solely on irresponsible credit rating certificates, without any real checks on the true underlying, would make the system shock proof to the failure of any single institution. This proved painfully false. The failure of a single institution would have brought down the whole system, were it not for strong and unprecedented government intervention. Economists had, misguidedly, developed blind faith in the power of the market to take care of itself as much as in the power of their complicated mathematical models. They ignored the simple humanities on the grounds that if consumers take on more debt than they can handle, those mathematical models would be blown into irrelevance.

For the next decade it would help to restore a semblance of stability if technological advances and innovation move alongside the ability of people to adopt them for their long-term betterment.

I take this opportunity to wish you all a peaceful finale to the decade and a prosperous 2010.

 

500 Fridays

500 Fridays

18^th December 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

“I remain a dreamer but dreaming is the raw material of creativity. However, dreaming tires you too, so I intend to take a break until I find it irresistible to start writing again. As Vera Lynn’s song goes, “we’ll meet again, don’t know where don’t know when but I know we’ll meet again some sunny day.” ”
This is the 500^th contribution in this series. It will also be the last.

The first contribution was published on 10th March 2000, titled ‘Welcome Professore’ which was a sort of open letter to Professor Romano Prodi who was visiting as President of the EU Commission to discuss our application for EU membership.

Since then I have kept my appointment with you every Friday except those few Fridays when newspapers were not published like Good Fridays, Christmas and Boxing Day.
500 is a nice round number and if I have to stop out of my own choice it is as good a place to stop as any. In writing this column I have tried to keep to three principles. Firstly, to stick to what I know and am familiar with, and to steer away from matters on which I felt I could not make a value-adding contribution. Secondly, I tried to choose subjects which were topical at the time I was writing. And thirdly, I tried not only to criticise fairly and without inhibitions, but also to offer new thinking and ideas on how what was being criticised could be addressed.

Whether I succeeded or not I leave to others to decide. What I know is that I did my best and if that was not good enough I stand by the judgement of my readers. If someone ever felt offended by my criticism I assure him/her that no offence was meant. I never criticised the person but their action, idea or proposal.

This country is not the same it was when I wrote my first contribution nearly 10 years ago. Accession to the EU has been a transformative experience. The discipline which it has imposed on us has in a way saved us from ourselves without suffocating our creativity and ingenuity. On the contrary, the challenge to succeed without artificial protection has brought the best out of our people and no doubt will continue to do so.

The reservations others and I had about EU membership were dispelled in the accession negotiating process where, in spite of our smallness, the EU allowed us to carry a disproportionate influence in the decision making process. Having a Maltese commissioner, being allowed to maintain our neutrality as provided in our Constitution, and similar concessions were given in areas that I had initially thought we would have to give away as part of gaining the accession prize.

Alfred Sant’s major fault was in not recognising that his own tough anti-membership campaign had strengthened the government’s hand in negotiating a generous package. He failed to adhere to the wisdom that to be consistent one should change one’s mind when the basic assumptions on which previous opinions were formed change. Continuing to oppose EU membership after the accession package was concluded in Copenhagen in December 2002, in spite of the package having addressed the main argument of Labour’s criticism, was Labour’s downfall, which led to defeat in the elections in 2003 and yet again in 2008, keeping Labour away from executive power for an extraordinarily long time. This state of affairs is not healthy for the proper working of democracy.

Challenges ahead remain as awesome as they were 10 years ago and this is not strictly related to the difficult recession the world is going through. Recessions come and go. Our challenges are more structural.

The major challenge is how to remain competitive to win in the global market so that our economy can sustain the social model which we have built and which is becoming exceedingly more expensive as our population gets older and as medical costs to sustain an aging population continue to increase.

My hope is that we can make this country a model of smartness. My vision is to emulate Singapore in how a small country could do things which bigger countries find so difficult to execute with the necessary flexibility for success. And when I say smartness I am referring more to the smart grid project being planned with IBM and less to Smart City type projects which in the end remain real estate projects that do not really make a lasting contribution to efficiency gains. The IBM model should be extended to other areas beyond the grid, to our traffic systems, to our education systems and other areas where today’s vision will probably become the norm in the world of the future. Our mission should be to use our smallness to become the technological laboratory of the world.

I remain a dreamer but dreaming is the raw material of creativity. However, dreaming tires you too, so I intend to take a break until I find it irresistible to start writing again. As Vera Lynn’s song goes, “we’ll meet again, don’t know where don't know when, but I know we’ll meet again some sunny day.”

All the best to all my readers.

A Strange World

A Strange World

13^th December 2009

The Malta Independent on Sunday

Alfred Mifsud

Isn’t it a strange world? European politics have been consistently rewarding the right-of-centre parties in one election after another, most notably in France, Italy and Germany, and whereas these right-wing governments are being forced by the financial crisis to adopt Keynesian measures involving state intervention more typical of socialist policies, in the only recent electoral success of the left in Europe through the PASOK victory in Greece, the government there will be forced, by the overwhelming debt and financial problems it has inherited, to adopt consolidation policies more typical of right-wing parties. Greek socialists are probably realising that the journey was more enjoyable than the destination.

I muse. What do left-wing parties, including Malta’s PL, have to do for a better future when many right-wing parties have plagiarised Keynesian economic policies and secured consistent electoral majorities, thanks to their being perceived as both businesslike and socially sensitive?

Only in the UK and in Spain has the left managed to plagiarise the right’s businesslike reputation and win electoral support. Both mandates were, however, secured before the financial crisis brought an increased tendency among electorates to choose governments with both businesslike and social sensitivity attributes. In fact, the UK Labour success seems to be nearing its end after a 12-year run, if current opinion polls remain unchanged up to the general election next spring.

How are socialist parties to resolve this crisis of identity in which electorates keep choosing left-wing policies but tasking right-wing parties to implement them? Should the left spend their time in opposition merely biting their nails as they wait for the right to mismanage the economy so much that they have to call in left-wing parties by default to execute a right-wing job, as in the case of Greece?

To bring the argument closer to home, by the time of the next general election, the PL will have been out of government for 26 years – if the 1996-1998 period is excluded. During this time, the PN has shed its conservative role and usurped from Labour the social democratic mantle, foisting on the PL a crisis of identity that renders it difficult for Labour to persuade the electorate that they stand for something different from the PN, rather than merely standing for the same thing with better execution.

Better execution, through reduction of bureaucracy, more transparency and re-energised commitment, is easy to promise but in the end it is a matter of credibility. Under its former leadership, following the 1998 debacle, Labour lost credibility – which remains the main currency for political success. It stands a much better chance now, under its new leadership.

The question remains, however, whether gaining credibility for better execution will be enough to bring Labour back in government or whether they will also need to refine their policies to render them distinguishable from those of the PN. And in the event of the latter, in what way are they to become distinguishable and yet retain popular support among an electorate that does not seem to have the appetite to move out of the centre stream?

I think the challenge is to educate the electorate to distinguish between real social democracy and fake copies that look cheap and attractive but store problems for the future, ballooning till they become unsustainable to the point of explosion, causing the sudden collapse of the social model that the electorate wholeheartedly wants.

The social democracy model is that a fair portion of government tax revenues, generally about 50 per cent, has to come from a progressive direct taxation system in which one contributes according to one’s abilities and receives according to one’s needs, in order to guarantee a social safety net that is high enough to offer protection from poverty but not so high that it encourages dependence.

The right-wing parties, who had to adopt the social model to occupy the mainstream and win election, have corrupted it. They introduced the concept of social benefits to all, irrespective of means. That would be ideal, if it were sustainable. Unfortunately, it is not. If taxpayers feel entitled to a children’s allowance and a free health service, irrespective of their means, we might just as well remove taxation and let everyone pay his own. But then we would have to kiss the social solidarity model good-bye. Do we want that?

Should we continue to pay children’s allowance to high-income earners rather than use such funds to reduce the deficit or increase social benefits to those who really need them?

Should we persist in pretending that we can afford a free health service to all, irrespective of means, if this inevitably means that such ostensibly free services will have to be rationed, disadvantaging the truly needy through long waiting lists and through discrimination that gives better accessibility to the wealthier, who generally have the connections to ensure priority service from our public offerings?

The PL must distinguish itself by espousing the real social democracy model that gives benefits to those who really need them, thereby protecting the sustainability of the social model in the interests of the most needy in society. It should expose the malicious nature of the copycats who adopt the social model for convenience rather than out of conviction, but in the process, like the father who spares the rod, will spoil the child.

There is a living example of what this will lead to. The shipyards’ experience, whereby government engineered its death by a thousand cuts rather than taking decisive action in time to restructure the enterprise to lasting commercial success, should be a salutary lesson to the fate of our social model under the care of managers who adopt it merely for election convenience rather than out of social conviction. 

The More Things Change

The More Things Change

11^th December 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

The more they stay the same. Take the Auditor General Report on Public Accounts 2008. Much of the same remarks found in the reports of previous years recur this year with monotonous regularity giving the distinct impression that many government departments consider the Auditor General’s intervention as a mere nuisance rather than as a means to protect public funds.

What particularly struck me is the Auditor’s report regarding exposure through Letters of Comfort and Bank Guarantees given by government to cover bank and other borrowing by state owned companies, entities and corporations. The exposure increased by more than a e100 million in 2008 closing at nearly e774 million up from e673 million the previous year.

Roll memories back to the Minister’s speech in presenting the Budget for 2003 read in parliament on 25 November 2002. There it was solemnly stated that it is: “Government’s declared policy not to provide any further security or comfort or other form of undertaking to credit or loans raised by public entities.”

This leaves no room for interpretation. The Government pledged not to provide guarantees, letters of comfort or undertakings to cover borrowings made by publicly owned enterprises. Yet here we are six years later, all commitments forgotten, to discover through the Auditor’s report that in 2008 e100 million worth of indirect financing was made to Corporations like Enemalta, Housing Authority, Malta Industrial Parks, Malta Shipyards, and Foundation for Tomorrow’s School. This trickery makes a mockery of the mainstream figures related to the Consolidated Fund which purport to measure the fiscal consolidation progress or lack of it.

But things also stay the same in the wider political scene. Next week the political parties will organise the usual telethons to collect funds from their faithful. All pledges to put political party funding on a transparent footing are stuck somewhere in the inter-parliamentary committee tasked to propose measures to render democracy more effective. Current obscurity on political party funding inevitably leads to suspicions that when in government, political parties have to discount obligations towards special lobby and interest groups. One third of this legislature has gone already and it is clear that what does not get done in the first half of a legislature will not get done in the second half when all considerations get tied to the elections which start appearing down the road on the political horizon.

But strange happenings will probably recur. The PN is in government only through a wafer thin majority. It is most likely that like most governments they lose popularity in the midterm section of their mandate and especially so this year when the economic scenario has substantially deteriorated since the last elections. So by default probably the PL presently has more popular support than the PN especially given that Labour’s change of leadership has done away with old baggage and lowered barriers set by the former leadership. This is not in any way to be interpreted as any prediction on the outcome of the next elections given that these are more than three years down the road, by which time the economic scenario will probably brighten up and government can reap the benefit of the strong medicine it is administering in the first half of the legislature. It only means to suggest that at this particular point in time the PL probably commands more popularity than the PN.

Yet as sure as night follows day the PN will collect much more funds than the PL from the telethon. What is the cause of this disconnection between the size of the collection and the grass roots popularity? One could make a case that this reflects the different social strata represented by the parties. The PL followers generally emanate from the lower social strata with spending power much inferior to the higher social strata of the PN followers. One might argue that per capita, PN’s followers contribute more to their party financing. I don’t buy into such reasoning.

I am more sold on the thesis that there is an immutable reality on the local political scene that whereas the PL is a standalone political party, the PN is a political cell in a power network spread throughout society which includes business, media, church, intelligentsia, and wherever there is any meaningful power or influence among society. This leads to a situation that when the PN is in government the network has total power and in the rare instance when the PN lose political power the network still maintains substantial power even if the political power temporarily switches to the PL. In such rare instances, as was witnessed in 1996-1998 interlude, the network’s power which acts as a tailwind to a PN government switches to a headwind for a PL government.

This was nowhere more evident than in the way the The Malta Independent on Sunday’s last editorial chastised the PL for their campaign insisting on transparency on the award of a very sizeable contract for extension of the Delimara power station. Rather than make such campaign its own, demanding transparency in a very suspicious set of circumstances leading to the award of this contract to a Danish bidder, the media crucifies the opposition and imputes that Labour campaign is motivated by their being dead set against the new power station.

What new power station may I ask? Delimara is no longer new. Labour was against Delimara when the decision to base the power station was still in balance. Now that Delimara is what it is, I have not heard any Labour spokesperson arguing against extending the Delimara power station. So why does the media make such wild insinuations against the opposition rather than use their influence to control the executive? This would only happen if the media, in spite of its independent tag, considers itself as part of the power network meant to protect its political cell.

Really the more things change the more they stay the same.

Getting Serious On Corruption

Getting Serious On Corruption

4^th December 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Any country that has proven systems to prosecute in an open, fair and transparent manner a former Chief Justice for an indiscretion involving a few thousand Euro should be proud of its record of being an effective democracy where corruption is not tolerated and where everyone is treated the same under the law even if he happens to be the very former Chief of the judicial system.

Whilst we may individually have opinions about whether the punishment was too lenient or too harsh, what is important for restoration of public faith in the court systems is that there is a strong general perception that justice has been carried out in a very impartial manner.

Personally I think that more needs to be done to ensure that the public’s faith in the court system is fully restored and strengthened. The persons involved have been judged and found guilty and have been sentenced without fear or favour. Whatever our feelings, we cannot have any doubts about the proper execution of his duties by the judge concerned who surely needed to overcome personal feelings in judging and sentencing his former chief.

But I question why we have not done anything to overhaul the system through which magistrates and judges get appointed to the Bench. Should not part of the moral guilt of the case in question be carried also by the system of how judges are appointed and by whoever used the system to make the appointments that proved so unsuitable?

We cannot be happy with a system where magistrates and judges are appointed at the sole decision of the minister, probably with some consultation with the Prime Minister, without a system of public grilling of the appointees by a parliamentary committee before confirmation.

To be an effective judge one must not only be conversant with the laws one is expected to interpret, but one should be well moulded in strong moral values, have solid understanding of psychological and physiological sciences, be utterly reticent in his dealings, have a reserved character which makes him not so easily accessible and has no interest outside the judiciary which could cause serious conflict of interest. These are some of the necessary, but not exhaustive, attributes one should have to make it to the judiciary. Can anyone honestly say that whoever appointed the ex-judges concerned to the Bench without proper screening against these and other relevant criteria, has made the judges, the court system and the nation any favours? Should not whoever made the decision about their appointment without proper screening also carry part of the moral guilt of the case?

This was not only a case of failure by the persons who have been convicted. It is also a case of failure of the system that appointed them in the first place. Punishing the culprits without overhauling the selection system, making it more thorough and transparent, means that this remains a job half (un)done.

Whatever credits the country might have earned through the conclusion of the judicial process involving the former Chief Justice (save for appeal which may be lodged) it was quickly lost in the laughable drama that happened this week in relation to the award of a high value contract to a Danish firm for installation of equipment to extend the power generation capacity of the Delimara Power Station.

The Opposition has long been arguing that there are strong suspicions of corruption in the award of the tender, where the following points have remained undisputed:

a. A Maltese agent has been involved and is due to receive a sizeable multi million Euro commission for helping the Danish firm to clinch the contract.

b. The Maltese individual is a private individual without corporate clout and his chief attributes were his access, as an ex-Enemalta engineer, to high ranking officials within Enemalta who were influencing the technical specifications of the tender.

c. During the negotiating process the Maltese agent had privileged access to information not simultaneously distributed to other bidders and boasted of his connections with persons in high levels of government.

d. Government changed the technical specifications of the contract from those originally announced in a way that favour the technology offered by the Danish winning bidder.

Throughout the serialisation of these accusations by a prominent member of the PL opposition there was complete silence on the part of the Danish bidder and his Malta agent. However when this week the PL leader gave prominence through a dossier presented to the Auditor General, of past claims of corruption that involved the same Danish bidder regarding contracts executed in other countries, the Danish company suddenly sprang into action to control damage to its reputation.

They quickly came to Malta to reassure us that the claims were false and were never actually made through proper prosecution without making it clear whether this was so only because at the time of their alleged commitment, the law was not rigid enough to cover corruption made in a foreign country outside Denmark. Basically was prosecution avoided because of a technical legality or because the accusations were unfounded?

Corruption is a serious matter. If allowed to go unchecked people will start gaining the impression that it is easy to get away with it and that once everyone else is doing it, it is perfectly rational to lower one’s own standard not to be disadvantaged. In the cases of the judges the system prevailed and this impression has been proved wrong. Why are we therefore tolerating this impression in the case of more substantial sums involved in such a big and important contract?

Once the Danish suppliers are paying a hefty commission to their Malta agent no one need prove any direct payment by the suppliers to local functionaries involved in awarding the contract. It is the local agent that has to be investigated and during this week this main actor was conspicuous by his absence. The Danish suppliers distanced themselves from their Malta agent by stating the he was his own man!

This is not a matter for the Opposition to investigate. The Opposition has no resources or legal powers to do so. Where there are serious suspicions as in this case, an independent Board of Investigation needs to be appointed and given wide brief and powers to investigate the whole process. The Auditor General may make his own parallel investigation as he is entrusted to do by Parliament.

Corruption takes many forms. Gaining access to privileged information and influencing contract specifications to favour one bidder over another are in themselves variants on the theme of corruption. It is time to get serious on corruption.