Internet Changes Everything

August 31, 2007

RBN (Russian Business Network)

Europe.view | A walk on the dark side | Economist.com

ACCORDING to VeriSign, one of the world’s largest internet security companies, RBN, an internet company based in Russia’s second city, St Petersburg, is “the baddest of the bad”. In a report seen by The Economist, VeriSign’s investigators unpick an extraordinary story of blatant cybercrime that implies high-level political backing.

In one sense, RBN (Russian Business Network) does not exist. It has
no legal identity; it is not registered as a company; its senior
figures are anonymous, known only by their nicknames. Its web sites are
registered at anonymous addresses with dummy e-mails. It does not
advertise for customers. Those who want to use its services contact it
via internet messaging services and pay with anonymous electronic cash.

But the menace it poses certainly exists. “RBN is a for-hire service
catering to large-scale criminal operations,” says the report. It hosts
cybercriminals, ranging from spammers to phishers, bot-herders and all
manner of other fraudsters and wrongdoers from the venal to the
vicious. Just one big scam, called Rock Phish (where gullible internet
users were tricked into entering personal financial information such as
bank account details) made $150m last year, VeriSign estimates.

Plenty of other internet companies sail close to the wind—hosting unregulated online gambling for example. But according to a VeriSign investigator, “the difference is that RBN is solely criminal”. The pricing depends on the level of complaints. A discreet organisation pays little; one that attracts a lot of unwelcome attention, forcing RBN to take expensive countermeasures, has to pay more.

Despite the attention it is receiving from Western law enforcement agencies, RBN is not on the run. Its users are becoming more sophisticated, moving for example from simple phishing (using fake e-mails) to malware known as “trojans” that sit inside a victim’s computer collecting passwords and other sensitive information and sending them to their criminal masters.

A favourite trick is to by-pass the security settings of a victim's browser by means of an extra piece of content injected into a legitimate website. An unwary user enters his password or account number into what looks like the usual box on his log-in page, and within minutes a programme such as Corpse’s Nuclear Grabber, OrderGun and Haxdoor has passed it to a criminal who can empty his bank account. When VeriSign managed to hack into the RBN computer running the scam, it found accumulated data representing 30,000 such infections. “Every major trojan in the last year links to RBN” says a VeriSign sleuth.

RBN even fights back. In October 2006, the National Bank of Australia took active measures against Rock Phish, both directly and via a national anti-phishing group to which the bank’s security director belonged. RBN-based cybercriminals replied by crashing the bank’s home-page for three days.

What can be done? VeriSign has tracked down the physical location of RBN’s servers. But Western law enforcement officers have so far tried in vain to get their Russian counterparts to pursue the investigation vigorously. “RBN feel they are strongly politically protected. They pay a huge amount of people. They know they are being watched. They cover their tracks,” says VeriSign. The head of RBN goes under the internet alias “Flyman”; his uncle is thought to be a senior St Petersburg politician. Repeated e-mails to RBN’s purported contact addresses asking for comment have gone unanswered.

Companies can simply block access to any site registered at an RBN IP address. But that will not help most victims, such as those who receive infected e-mails. VeriSign says only strong political pressure on Russia will make the criminal justice system there deal with this glaring example of cyber-illegality.

August 31, 2007 at 03:17 PM in Security | Permalink | Top of page | Blog Home

August 07, 2007

In Dusty Archives, a Theory of Affluence

Review - A Farewell to Alms - Industrial Revolution - Human Population - New York Times

By NICHOLAS WADE Published: August 7, 2007

For thousands of years, most people on earth lived in abject poverty,
first as hunters and gatherers, then as peasants or laborers. But with
the Industrial Revolution, some societies traded this ancient poverty
for amazing affluence.

Historians and economists have long struggled to understand how this
transition occurred and why it took place only in some countries. A
scholar who has spent the last 20 years scanning medieval English
archives has now emerged with startling answers for both questions.

Gregory Clark, an economic historian at the University of California,
Davis, believes that the Industrial Revolution — the surge in economic
growth that occurred first in England around 1800 — occurred because of
a change in the nature of the human population. The change was one in
which people gradually developed the strange new behaviors required to
make a modern economy work. The middle-class values of nonviolence,
literacy, long working hours and a willingness to save emerged only
recently in human history, Dr. Clark argues.

Because they grew
more common in the centuries before 1800, whether by cultural
transmission or evolutionary adaptation, the English population at last
became productive enough to escape from poverty, followed quickly by
other countries with the same long agrarian past.

Dr. Clark’s
ideas have been circulating in articles and manuscripts for several
years and are to be published as a book next month, “A Farewell to
Alms” (Princeton University Press). Economic historians have high
praise for his thesis, though many disagree with parts of it.

“This is a great book and deserves attention,” said Philip Hoffman, a historian at the California Institute of Technology.
He described it as “delightfully provocative” and a “real challenge” to
the prevailing school of thought that it is institutions that shape
economic history.

Samuel Bowles, an economist who studies
cultural evolution at the Santa Fe Institute, said Dr. Clark’s work was
“great historical sociology and, unlike the sociology of the past, is
informed by modern economic theory.”

The basis of Dr. Clark’s
work is his recovery of data from which he can reconstruct many
features of the English economy from 1200 to 1800. From this data, he
shows, far more clearly than has been possible before, that the economy
was locked in a Malthusian trap _ — each time new technology increased
the efficiency of production a little, the population grew, the extra
mouths ate up the surplus, and average income fell back to its former
level.

This income was pitifully low in terms of the amount of
wheat it could buy. By 1790, the average person’s consumption in
England was still just 2,322 calories a day, with the poor eating a
mere 1,508. Living hunter-gatherer societies enjoy diets of 2,300
calories or more.

“Primitive man ate well compared with one of the richest societies in the world in 1800,” Dr. Clark observes.

The
tendency of population to grow faster than the food supply, keeping
most people at the edge of starvation, was described by Thomas Malthus
in a 1798 book, “An Essay on the Principle of Population.” This
Malthusian trap, Dr. Clark’s data show, governed the English economy
from 1200 until the Industrial Revolution and has in his view probably
constrained humankind throughout its existence. The only respite was
during disasters like the Black Death, when population plummeted, and
for several generations the survivors had more to eat.

Malthus’s
book is well known because it gave Darwin the idea of natural
selection. Reading of the struggle for existence that Malthus
predicted, Darwin wrote in his autobiography, “It at once struck me
that under these circumstances favourable variations would tend to be
preserved, and unfavourable ones to be destroyed. ... Here then I had
at last got a theory by which to work.”

Given that the English
economy operated under Malthusian constraints, might it not have
responded in some way to the forces of natural selection that Darwin
had divined would flourish in such conditions? Dr. Clark started to
wonder whether natural selection had indeed changed the nature of the
population in some way and, if so, whether this might be the missing
explanation for the Industrial Revolution.

The Industrial
Revolution, the first escape from the Malthusian trap, occurred when
the efficiency of production at last accelerated, growing fast enough
to outpace population growth and allow average incomes to rise. Many
explanations have been offered for this spurt in efficiency, some
economic and some political, but none is fully satisfactory, historians
say.

Dr. Clark’s first thought was that the population might
have evolved greater resistance to disease. The idea came from Jared
Diamond’s book “Guns, Germs and Steel,” which argues that Europeans
were able to conquer other nations in part because of their greater
immunity to disease.

In support of the disease-resistance idea,
cities like London were so filthy and disease ridden that a third of
their populations died off every generation, and the losses were
restored by immigrants from the countryside. That suggested to Dr.
Clark that the surviving population of England might be the descendants
of peasants.

A way to test the idea, he realized, was through
analysis of ancient wills, which might reveal a connection between
wealth and the number of progeny. The wills did that, , but in quite
the opposite direction to what he had expected.

Generation after
generation, the rich had more surviving children than the poor, his
research showed. That meant there must have been constant downward
social mobility as the poor failed to reproduce themselves and the
progeny of the rich took over their occupations. “The modern population
of the English is largely descended from the economic upper classes of
the Middle Ages,” he concluded.

As the progeny of the rich
pervaded all levels of society, Dr. Clark considered, the behaviors
that made for wealth could have spread with them. He has documented
that several aspects of what might now be called middle-class values
changed significantly from the days of hunter gatherer societies to
1800. Work hours increased, literacy and numeracy rose, and the level
of interpersonal violence dropped.

Another significant change in
behavior, Dr. Clark argues, was an increase in people’s preference for
saving over instant consumption, which he sees reflected in the steady
decline in interest rates from 1200 to 1800.

“Thrift, prudence,
negotiation and hard work were becoming values for communities that
previously had been spendthrift, impulsive, violent and leisure
loving,” Dr. Clark writes.

Around 1790, a steady upward trend in
production efficiency first emerges in the English economy. It was this
significant acceleration in the rate of productivity growth that at
last made possible England’s escape from the Malthusian trap and the
emergence of the Industrial Revolution.

In the rest of Europe and
East Asia, populations had also long been shaped by the Malthusian trap
of their stable agrarian economies. Their workforces easily absorbed
the new production technologies that appeared first in England.

It
is puzzling that the Industrial Revolution did not occur first in the
much larger populations of China or Japan. Dr. Clark has found data
showing that their richer classes, the Samurai in Japan and the Qing
dynasty in China, were surprisingly unfertile and so would have failed
to generate the downward social mobility that spread
production-oriented values in England.

After the Industrial
Revolution, the gap in living standards between the richest and the
poorest countries started to accelerate, from a wealth disparity of
about 4 to 1 in 1800 to more than 50 to 1 today. Just as there is no
agreed explanation for the Industrial Revolution, economists cannot
account well for the divergence between rich and poor nations or they
would have better remedies to offer.

Many commentators point to
a failure of political and social institutions as the reason that poor
countries remain poor. But the proposed medicine of institutional
reform “has failed repeatedly to cure the patient,” Dr. Clark writes.
He likens the “cult centers” of the World Bank and International Monetary Fund to prescientific physicians who prescribed bloodletting for ailments they did not understand.

If
the Industrial Revolution was caused by changes in people’s behavior,
then populations that have not had time to adapt to the Malthusian
constraints of agrarian economies will not be able to achieve the same
production efficiencies, his thesis implies.

Dr. Clark says the
middle-class values needed for productivity could have been transmitted
either culturally or genetically. But in some passages, he seems to
lean toward evolution as the explanation. “Through the long agrarian
passage leading up to the Industrial Revolution, man was becoming
biologically more adapted to the modern economic world,” he writes.
And, “The triumph of capitalism in the modern world thus may lie as
much in our genes as in ideology or rationality.”

What was being
inherited, in his view, was not greater intelligence — being a hunter
in a foraging society requires considerably greater skill than the
repetitive actions of an agricultural laborer. Rather, it was “a
repertoire of skills and dispositions that were very different from
those of the pre-agrarian world.”

Reaction to Dr. Clark’s thesis
from other economic historians seems largely favorable, although few
agree with all of it, and many are skeptical of the most novel part,
his suggestion that evolutionary change is a factor to be considered in
history.

Historians used to accept changes in people’s behavior
as an explanation for economic events, like Max Weber’s thesis linking
the rise of capitalism with Protestantism. But most have now swung to
the economists’ view that all people are alike and will respond in the
same way to the same incentives. Hence they seek to explain events like
the Industrial Revolution in terms of changes in institutions, not
people.

Dr. Clark’s view is that institutions and incentives have
been much the same all along and explain very little, which is why
there is so little agreement on the causes of the Industrial
Revolution. In saying the answer lies in people’s behavior, he is
asking his fellow economic historians to revert to a type of
explanation they had mostly abandoned and in addition is evoking an
idea that historians seldom consider as an explanatory variable, that
of evolution.

Most historians have assumed that evolutionary
change is too gradual to have affected human populations in the
historical period. But geneticists, with information from the human genome
now at their disposal, have begun to detect ever more recent instances
of human evolutionary change like the spread of lactose tolerance in
cattle-raising people of northern Europe just 5,000 years ago. A study
in the current American Journal of Human Genetics finds evidence of
natural selection at work in the population of Puerto Rico since 1513.
So historians are likely to be more enthusiastic about the medieval
economic data and elaborate time series that Dr. Clark has
reconstructed than about his suggestion that people adapted to the
Malthusian constraints of an agrarian society.

“He deserves kudos
for assembling all this data,” said Dr. Hoffman, the Caltech historian,
“but I don’t agree with his underlying argument.”

The decline
in English interest rates, for example, could have been caused by the
state’s providing better domestic security and enforcing property
rights, Dr. Hoffman said, not by a change in people’s willingness to
save, as Dr. Clark asserts.

The natural-selection part of Dr.
Clark’s argument “is significantly weaker, and maybe just not
necessary, if you can trace the changes in the institutions,” said
Kenneth L. Pomeranz, a historian at the University of California,
Irvine. In a recent book, “The Great Divergence,” Dr. Pomeranz argues
that tapping new sources of energy like coal and bringing new land into
cultivation, as in the North American colonies, were the productivity
advances that pushed the old agrarian economies out of their Malthusian
constraints.

Robert P. Brenner, a historian at the University of
California, Los Angeles, said although there was no satisfactory
explanation at present for why economic growth took off in Europe
around 1800, he believed that institutional explanations would provide
the answer and that Dr. Clark’s idea of genes for capitalist behavior
was “quite a speculative leap.”

Dr. Bowles, the Santa Fe
economist, said he was “not averse to the idea” that genetic
transmission of capitalist values is important, but that the evidence
for it was not yet there. “It’s just that we don’t have any idea what
it is, and everything we look at ends up being awfully small,” he said.
Tests of most social behaviors show they are very weakly heritable.

He
also took issue with Dr. Clark’s suggestion that the unwillingness to
postpone consumption, called time preference by economists, had changed
in people over the centuries. “If I were as poor as the people who take
out payday loans, I might also have a high time preference,” he said.

Dr.
Clark said he set out to write his book 12 years ago on discovering
that his undergraduates knew nothing about the history of Europe. His
colleagues have been surprised by its conclusions but also interested
in them, he said.

“The actual data underlying this stuff is
hard to dispute,” Dr. Clark said. “When people see the logic, they say
‘I don’t necessarily believe it, but it’s hard to dismiss.’ ”

August 7, 2007 at 10:21 PM in Consumer trends | Permalink | Top of page | Blog Home

August 06, 2007

Looks Like an Old-Fashioned Consumer Credit Crunch

Looks Like an Old-Fashioned Consumer Credit Crunch

Expect shock waves as credit standards and normal risk premiums return to the credit markets

by Dennis Jacobe

GALLUP NEWS SERVICE

PRINCETON, NJ – Once upon a time, a housing- and autos-led recession was a basic feature of the U.S. economic cycle. In those days, there were interest rate ceilings – a legacy of the Great Depression of the 1930s -- on the interest rates financial institutions could pay for deposits. As a result, as the Fed raised interest rates above those deposit-rate ceilings, money flowed out of local financial institutions, creating a "consumer credit crunch" that severely limited the availability of housing and auto loans. In turn, the economy slowed, often going into recession until inflation and interest rates came back down to levels that encouraged money to flow back into the nation's depository institutions.

Of course, all of those artificial regulatory limits on money flows are long gone and with them the experience of a consumer credit crunch. Today's financial markets allow the free flow of money worldwide, making liquidity readily available to consumers, businesses, and investors by way of numerous forms of securitization -- the packaging of loans for sale to investors. In fact, one of the factors extending the economic expansion of recent years and the boom on Wall Street that sent the Dow Jones average to a record 14,000 on July 19 may have been a worldwide glut of liquidity.

Over the past couple of weeks, however, financial market conditions have changed dramatically. As substantiated by the UBS/Gallup Index of Investor Optimism for July, the nation's residential real estate markets continue to get worse, not better. At the same time, the subprime mortgage debacle has many investors concerned about a consumer credit crunch and has sent the Dow Jones average plunging more than 800 points since its July peak. In this regard, the average investor may have been somewhat prescient in UBS and Gallup's most recent poll, because the Index of Investor Optimism declined in July for the second month in a row. In addition, the issues of a significant tightening of global liquidity, a U.S. consumer credit crunch, and the possibility that the current economic slowdown might turn into a full-fledged recession are likely to be major discussion topics as the Federal Open Market Committee (FOMC) meets this week.

Residential Real Estate Continues to Deteriorate

The old quip that the light at the end of the tunnel is really a train coming through may well apply in most residential real estate markets as the summer comes to a close. During the first half of July, 71% of investors said they perceived that residential real estate conditions nationwide were getting worse. This maintains a pattern of pessimism concerning the national outlook for the housing market that has persisted in Gallup's surveys for many months. Further, 78% of investors said the potential for a housing or real estate crash in some local markets was hurting the investment climate a lot (41%) or a little (37%) during July.

It is likely that this national perception has been affected somewhat by the well-publicized problems of various housing markets that once were super hot, not to mention the subprime mortgage mess. As a result, the finding that 60% of investors believe conditions in their local real estate markets are getting worse is of even greater concern. Presumably, most of the nation's investors are much more knowledgeable about their local housing market conditions than they are about those nationwide.

Potential "Consumer Credit Crunch"

A consumer credit crunch takes place as lenders refuse to make money available to many if not most borrowers. During the first half of July, 76% of investors said the consumer credit crunch was hurting the investment climate a lot (40%) or a little (36%). This is not as high as some other investor concerns, such as the worry over energy prices, with 92% of investors saying those high prices are hurting the investment climate a lot (70%) or a little (22%). Still, its comparative newness as a significant investor concern, the general public's lack of recent experience with a real consumer credit crunch, and the fact that the UBS-Gallup poll was taken during the first half of July -- before the equity markets began their recent plunge -- all suggest that the danger of a consumer credit crunch was surprisingly high on investors' worry lists early last month.

Potential for Recession

Over the past couple of years, fears of a potential recession have tended to center on the willingness of the U.S. consumer to continue spending. In this regard, some have seen the bursting of the housing bubble as a reason for the consumer to pull back on spending as the "wealth effect" benefits of past homeowner equity gains dissipated. Similarly, soaring gas prices have been seen as another drag on consumer spending, particularly for low- and moderate-income consumers.

Still, many observers have argued that consumers will continue spending as long as they have jobs and can continue to borrow money. This is where the real danger of an old-fashioned consumer credit crunch comes to bear. A consumer credit crunch, as noted, takes place as lenders refuse to make money available to many if not most borrowers. In fact, even borrowers with top-notch credit scores can see their cost of borrowing surge higher as liquidity is reduced.

What causes a credit crunch? In today's financial markets, many lenders make loans but do not hold them in their portfolios. Instead, they sell them to investors in the form of securitized investments. What appears to be happening in recent weeks is that the huge losses associated with some subprime mortgage investments are not only creating significant new risk premiums but also causing potential investors to shun all mortgage investments not guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. For example, on Friday various mortgage lenders announced that they could no longer sell various types of jumbo mortgage loans and special feature mortgage loans to the investment markets. As a result, some lenders decided to stop making various types of mortgage loans and sharply increase the pricing of the loans they would make.

Will this kind of consumer credit crunch be contained to selected areas in the mortgage market or will it spread to home equity loans/lines and maybe even to small business loans? The reality is no one really knows -- no one has any experience with this kind of potential liquidity problem. It depends on how much exposure holders of various kinds of securitized debt have and what happens to the value of that debt, particularly some of Wall Street's more exotic creations. What is known is that fears about the potential fallout in the mortgage securities market, not to mention a global tightening of liquidity, are already creating a consumer credit crunch. In this regard as well, the investors in our July poll may have been truly prescient.

Will There Be a Fed Bailout?

When the FOMC meets at the Federal Reserve Board on Tuesday, the discussions may include a number of topics not discussed in those hallowed halls for many years. Inflation, interest rates, economic slowdown, and even potential recession are fairly common topics for monetary authorities. However, "liquidity" is a totally different kind of issue. A lack of liquidity can lead not only to financial failures but also to the failure of the capital markets to function properly. Of all the responsibilities of the Fed, maintaining orderly financial markets heads the list.

At the conclusion of the FOMC meeting next week, monetary authorities may well come out with some reassuring words about the stability of the financial markets and their willingness to stand ready to provide liquidity to the system if necessary. On the other hand, they may say nothing about the liquidity issue, fearing that any statement will only make things worse, not better. Either way, the hope will be that the fears of the past couple of weeks will blow over and the credit crunch can be contained to the mortgage securities market. However, if following the FOMC meeting, the Fed states that it will provide liquidity to various investment banking firms and/or hedge funds, then a much more serious scenario may be underway.

Regardless, the return of a real consumer credit crunch would leave no doubt that the recovery of the housing markets will take a lot longer than previously anticipated and that consumers will have to pull back on their spending significantly. If that happens, then the probability of a recession late this year and into early 2008 would increase significantly.

Survey Methods

Investor results are based on telephone interviews with 800 investors, aged 18 and older, conducted July 1-12, 2007. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

August 6, 2007 at 05:02 PM in Consumer trends, Financial Services | Permalink | Top of page | Blog Home