Creative Destruction: The Old GDP and the New SEC

The schism between the old and the new in the economy was highlighted today as those who have been resisting the concept of an inevitable U.S. recession were forced into capitulation by the revision of 4th Quarter 2007 GDP, which showed a decline rather than a gain. Although the 2nd Quarter of ‘08 showed a gain of 1.9%, or $106B, this included government transfers of $145 B and defense expenditures of $29B. In other words, without these amounts GDP would have declined in Q2 this year as well.

Perhaps more importantly than whether we have satisfied the text-book definiton of a recession, we are entering a prolongued period of economic hardship characterized by continued housing declines, increased job losses and a slow-down in the Economy. As Greenspan stated today, we are nowhere near a bottom in housing prices, which has been the leading indicator of the downturn.

The continued weakness in the economy is the inevitable result of the excess liquidity of the early-2000’s and unfortunately this pain is inevitable.

However, I have recently been introduced to the economic concept of Creative Destruction which was popularized by economist Joseph Schumpeter.

Basically, the concept, as articulated previously by Hegel in more general conceptual terms, suggests that in order to create the future we must first negate the past. In Economic terms it means that sometimes in order for innovation to occur, we must first sometimes experience the destruction of old ways of doing things.

What we may be witnessing today is the failure of some of the more challenged parts of our economy as individuals are forced to make tough choices as they suffer the cut-backs required by a retrenchment in the amount of leverage in the system. As people's incomes are squeezed, they are at the same time choosing to drive more fuel efficient cars, utilize more technological tools rather than paper products that consume trees and produce waste, and eat less unhealthy foods. As a result, companies that rely on the old way of doing things are suffering.

Even the SEC, the stodgy old guard of the federal government responsible for the regulation of publicly traded companies, today announced that Blogs can now serve as an outlet for public disclosure in certain cases. The innovation, which is a positive for social media ventures like Twitter and others, is discussed here:

SEC To Recognize Corporate Blogs as Public Disclosure. Can We Now Kill the Press Release?

This move, in the midst of another challenging day in the markets, suggest that progress, creativity and technological innovation will continue, no matter how dark the current environment becomes.

Unfortunately, there is more bad news on the horizon for home values, financial institutions, and the economy. However, if we keep this concept of creative destruction in mind, perhaps the silver lining becomes easier to see.

On the Markets, Twitter, and Leading a Public Life

The markets are up today…and a few companies that I was concerned about beat earnings. This ordinarily should be good news, and in a lot of ways it is. I am very glad that oil is starting to show some signs of cracking. Whether this is sustainable will surely take some time to decipher, and the bad housing news unfortunately does not bode well for the economy.

However, today’s moves in the markets happened to coincide with an exchange that I had with a senior, and brilliant, investor that ended with us coming out on the opposite sides of an issue. The thing is, I feel strongly about my view, and even after considering his perspective I stand beside my own. The challenge for me is that when I am faced with information suggesting some of my views are mistaken, it becomes difficult to remain confident in other parts of my thesis…

How does any of this “markets” talk relate to Twitter?

Twitter for me represents a new form of social interaction. Yesterday at the #smcla event, I experienced a now somewhat usual event: I met someone I have “known” on Twitter for months for the first time “in person.” She was as charming face-to-face as expected, and although I have had a few of these online-offline merges over the last few months, it is still somewhat jarring for the first few seconds of the conversation as the impressions from the textual communications are fused with those of the voice, image, and in person mannerisms.

Twitter has allowed me to interact with a whole new group of people that I likely would have never met if not for its existence. These interactions have also created a new “public” image of myself, where I talk about my daily-goings-on, share small observations on life, and recently, I have even linked my Twitter to this venue of more extensive expressions.

In doing so, I have *opened* myself to the world, and as a result I am now living a more public life than ever before. Even when involved in student government and other apparently public activities, I never really put my opinions out for examination in a public forum – speeches and meetings were scripted, thought out, and muted.

But on this blog, on Twitter, and now in my career, I am stating my opinion publicly – putting a stake in the ground, on the record so to speak. And in doing so, I am subject to observation, disagreement, and often I am wrong for the entire world to see.

This feeling of public mistake and the observation of it has been difficult to digest…

But the benefits that come from Twitter, and from having a conversation with those of you who read this blog are worth the angst.

Plus, we just had an earthquake here in Los Angeles – sometimes life helps to put things in perspective.

So I will continue to participate in these conversations, meet new friends on Twitter and elsewhere, and I will even take chances in my career. As the brilliant Marshall Mathers once observed, “You only get one shot...”

Notes from Social Media Club LA, #smcla

Here are the notes from the Social Media Club LA meeting at Mahalo.

@BrianSolis, @NicoleJordan, @JackiePeters, @Richman17 and @Chiropractic were the panel.

Define "Social Media":

Anything that facilitates conversations online.

3rd wave of communications - 1 direct, 2 interaction with site, 3rd - interaction with each other.
Shift away from email. Analogy to business is becoming more about "fun" and "social".

Still a whole world who hasn't come on board yet. Broaden the definition to get wider adoption.

We should broaden the definition.

But remember that we are left hand side of the curve - We should think broadly about the socialization of content.

Yelp! Changing the game about influence.

Normal people who have influence and something to say. Power of influence is broadening.

Jay Rosen - we are the people formerly known as the audience.

What is SocialMedia beyond the technology? How people are using it.

Social tools are old: Deja News, Yahoo!Groups.

People are thriving off interaction - but how can we use these for the greater good?

Different tribes - different cultures - immersion and observation are crucial. Conversational marketing is bs...it is not empathetic. You need to listen.

Medium defines the message - blogging platforms (LiveJournal let's you personalize and privatize, vs others that don't). Twitter changes our communication.

Some brands are just about crashing and make the dialogue focused on them vs contributing to them. Pushing vs not actually being part of the conversation.

Are we all experts here?
No. We are all learning.

Is Comcast actively listening to people?

Test. @comcastcares. He replied to the email. Us this a bs strategy? He replies: yes. But we have 5 - 7 people...facilitating all this stuff internally and 1 guy has saved company money. Improving brand and relationships.

Game changer for brands?

HealthCare is notorious for not helping people.

Some people are starting to change.

Old way - you have no real way of knowing if it works. Example of Nissan and flashy ads with no results.

People are now creating ads for other companies and winning awards - brand hijacking. Smarter companies are looking at this.

A lot of big brands are adriad of negative feedback. You can embrace this feedback to make it into a positive experience. See Zappos and how he balances corporate with the humanity. We are revealing more about ourselves on a personal level.

It is about the socialization of this. Tony of Zappos.

Power of positive influence. Reputation matters.

See Virgin - anti-social.

Key is to be social.

How do you do this in a big company?
Play it safe: keep it in marketing.

See SEO...are you ok if Tony from Zappos is not a real person? Maybe. See Obama.

Issues of sincerity.

Example of real people representing a real company.

Power of real people. They connect.

People don't interact with companies - they interact with people.

Which department owns social media?

PR? In 100 percent of actual cases it comes out of customer service. They are willing to understand that social media is worth it because it is a "cost center".

All employees should keep an eye on it. PR people should keep an eye on it though a they can have a big picture understanding. But it should permeate the organization.

PR doesn't get paid to listen. Trend - outsourcing "listening" to India or Jamaica.

It all goes back to business fundamentals. AAPL - service.

Don't forget it is about people - whole foods? Buy what about fake identity?

Not trustworthy.

If social conversations are getting shorter, where are deeper conversations happening?

Conversation is thinning and spreading. Comments on variety of networks and networks - 36 hours just to respond.

Conversation is changing shape.

Social media and authenticity. Seth Godin - be remarkable, and don't be authentic. If you game the system, it is only a matter of time until you become found out.

Online conversation does get carried offline. Take in person relationships to another level.

What do we do to keep this from becoming hype? What is being done to scale it?

Sociology of this is important. Number? 50 percent? See Forrester - scale of public participation.

But we are still on the left side of the bell curve.

There is no audience anymore. Companies need to go find people and find out how they are being discussed. Are people where you are targeting. Start by listening.

Targeting is important but different for different companies and different brands.

Hard question. Fast-forward. Everyone has socialized everything to death. What happens? Are we buying minds? Do we have employees and customer service?

We will all always be on the left side of the curve. This will eventually be mainstream and we will move onto semantics and predictive markets. Predictive and semantic intersection with social world will be off the hook.

Pay attention to who the linkerati is out there. Let the people do the work...to carry your message further.

Search the key words that matter your business. Google: Essential Guide to Social Media.

Example: competitor went first to answer the questions. Outbound resource center for the people.

Smart companies are trying to do this but the various different groups are not coordinated. Internal HR issues make execution difficult. This is a key problem to address.

People think it is a campaign. BlairWitch of 2.0. They need a "social media" officer. Need it to do it 1 company at a time. What about "community manager"? They have more trust than CMO's.

Make us a viral video - it is the People that make it viral.

Analytics make it powerful.

Key is to smart small - see Google.

HomePage of Digg is still only 4,000 people.

Check out Help A Reporter: http://shankman.com

Old school people are not going to get on Twitter....son got off Facebook when she got on. Individual here can't even get her company (BigCo) to even participate in "viral" marketing.

How do we educate the masses? "But that's just online."

Question: What is your content?

Answer: Be interesting, compelling and valuable.

But we aren't even there yet. See JohnEdwards - it should not be a one-way broadcast mechanism.

Conversations are King.

IBM's social networking platform: how will we monetize this?

Answer is difficult.

Metrics matter. In corporate context - filter content. What metrics matter most? Talk later.

We all have a currency that other people don't have.

Check out Mahalo.com.
Etc.

Thanks to an excellent panel!

www.socialmediaclub.la will be the Blog.

Keep Learning - Admit Failure

One thing I admire about older people is when they continue to stretch their minds and learn new subjects into their later years. I hope that no matter what happens to me physically or otherwise that I can retain the curiosity that makes life interesting and inspires me to keep digging into new subjects.

One of the key elements of learning that I have been reflecting on of late is the ability to admit when you are wrong. As a somewhat arrogant "A-type" guy, I have never been one to accept defeat lightly - on way too many subjects.

However, this blog has been a place where I can not only spout my theories about the financial markets, which have unfortunately played out correctly for the most part, but they have also publicly highlighted my mistakes - leaving little room for backtracking.

Case in point was my blog post almost one year ago (August - 2007) praising IndyMac for its transparency as the credit crisis first began to worsen:

Transparency Is Sometimes Scary

Although I did not explicitly state that the company would be OK at the time, I did complement the CEO and the company itself for being upfront with investors about how bad the situation was at the time - a time when CFC had yet to crack and few were acknowledging just how bad things were in the market.

The mistake I made was trusting transparency as enough for the continued viability of Indymac. I thought that the company would be able to make it through the difficult times by remaining open and honest with its investors.

Friday, the FDIC shut down Indymac in the second largest bank failure in history:

IndyMac Bank seized by federal regulators

The depositors will get their funds, and the taxpayers (through the FDIC) will ensure that the repercussions of this failure will be as muted as possible.

However, when I look at the implications of this for the housing market and the continued challenges of our economy a darker picture emerges...one that begins to call into question my continued hopes for optimism echoed over the last few months here on this blog.

If the second largest mortgage originator is closed and Freddie and Fannie are barely viable (for those interested, Paulson today announced that the government may have to pour more funds into these entities to ensure their viability, discussed here:
Paulson Seeks Authority to Shore Up Fannie, Freddie) how is the housing market going to rebound?

Sure the Senate announced a $300B bill to help stem foreclosures, but this has yet to be jibed with the House version, and even then it is unclear Bush will sign it.

But what about going forward? All indications are suggesting that the innovation of securitization is dead if not on life support...and this means that the promise of a new paradigm of global liquidity may be gone with it.

A world with less capital floating around is less comfortable for all of us, as we are forced to start making choices again that perhaps we were able to refinance only two years ago. And homeowners can't refinance or finance at all without a bank to lend to them.

With these dark clouds looming, I am nevertheless retaining a nuggest of optimism for the innnovations of social-media and green energy as two areas where tangible and exciting things continue to happen.

Whether in the announcement that:

SunPower (SPWR) Selected By FPL To Build Largest Solar Photovoltaic Power Plant in US

or in the 3G Iphone global launch on Friday, exciting stuff continues to happen even as the clouds on the global economy continue to darken.

So I will continue to fuel the flames of my curiosity by exploring those two areas...and probably too many more.

And I will continue to look into the mirror and honestly admit my mistakes - as much as I can while keeping my head just high enough.

Save Our Neighbors' Homes

One area that has yet to "bottom" in any sense, and one that unfortunately does not appear to be improving anytime soon is the housing market.

This news today from Bloomberg is unsurprising, but nevertheless sad to hear:

Foreclosures Rose 53% in June, Bank Seizures Triple

U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions increased the most since RealtyTrac Inc. began collecting data in January 2005 as deteriorating property values forced more people to give up their homes

Unlike statistics about big companies taking billions of dollars in writedowns, these home foreclosure statistics are about real people losing the most important tangible things in their lives...their homes.

Some self-righteous "free-marketers" I have met like to get on their high horses and say stuff like: "They shoulda' known better before gettin' in that house they couldn't afford" or even worse "It serves 'em right for overextending themselves", but such a view is not only insensitive, it is also borderline unintelligent at a macro level.

Very simply: if the most sophisticated investors and financial analysts in the world, including the Federal Reserve, could not anticipate the possibility that the housing market might implode like it has, how could an average American with a moderate education do so? In other words, why was it so unreasonable for homeowners to buy into the same hype about the housing market that is now coming back to bite the creators and sellers of residential ABS, CDO's and other securities?

To me it seems almost irrational to have such a double standard, but perhaps more importantly it is insensitive and un-American.

We live in this country as fellow-citizens relying on one another for things from as simple as our city streets and services to things more complex and difficult like war and peace and finally for our financial system including the real estate mortgage market. That the mortgage finance market is important is beyond debate given how central the concept of 'home ownership' is to the American Dream. Its importance is reflected in the ongoing discussions in Washington about what should be done to help Fannie and Freddie as well as the government's intervention in preventing the failure of Bear Stearns.

While relying on the government to do something to help here while shaking our heads at our neighbors is surely an easy thing to do, it is, as I stated above, an unAmerican way of dealing with the situation. As citizens who help one another in a myriad of ways, a better way of dealing with the foreclosure crisis would be to literally go next door and talk to your neighbor about the challenges she faces. Those of us who happen to be graced with a more comfortable situation should try to think of ways to help those who are feeling the strains of the housing crunch just like we tie yellow ribbons around trees to support our troops abroad or stop on the side of the street to help someone with a flat tire.

I know such a statement is amorphous and perhaps idealistic, but as millions of our fellow citizens continue to lose their homes, it seems to be important. Maybe writing your government representatives in Washington is enough given the realistic strains on your time and energy.

But in the mean time, before you or someone you know makes an insensitive or irrational comment about how homeowners should have known better, consider this fact:

Warren Buffett's Berkshire Hathaway's stock is down 35% since November of last year.

If Buffett can't navigate the current markets, how can we expect more from homeowners?

I am hopeful that we will come together, perhaps through Congress, to do something to help here. In the mean time, good luck with your mortgage payment and your portfolio.

Positive Signs?

Although it is hard to think we are nearing a bottom in the credit crisis when Bridgewater comes out with estimates that losses will reach $1.6T (topping Mr. John Paulson's estimates of $1.2T this Spring), there are emerging signs that the "crisis" has become consensus and that perhaps we are nearing some kind of bottom or inflection point.

One such sign is that the following comprehensive report from Wharton details much of what has been discussed here and on other blogs over the last year:

Inside the Subprime Crisis

In other words, now that the knowledge and details of the various components of the fall-out in the credit markets is being understood and discussed, it seems logical to conclude that the collective masses can now start to address and stop the underlying cause. One such cause - the lack of understanding itself - is clearly mitigated by discussions like this.

Another sign, on the absurd front, was this article yesterday on Bloomberg:

Toxic CDOs Given Up for Dead Coming to Life With Pension Funds

In the "a rose by any other name would smell as sweet" category, it appears that Wall Street may have found a way to resurrect the securitization market:

Collateralized debt obligations that helped drive banks to $400 billion of writedowns and credit losses are finding buyers under a different name: Re-Remics

The aburdity of the Re-Remics' name underscores the challenges the credit markets are facing and at the same time it highlights the innovative spirit of capitalism.

And it is this spirit that brings optimism...the thousands of brilliant (yes - these dudes are mad-smart) men and women on Wall Street are not going to roll over and play dead as the markets grind to a halt. Instead, they will and have been doing the opposite. They will fight tooth and nail to find a way to jump start the machine of credit.

Given that Uncle Ben has made it clear that he is going to continue to reach out a welcoming hand to pull the crew along, I can begin to see a scenario where the losses from residential mortgage lending and buy-out finance don't spread to consumer loans, commercial real estate, and corporate credit en masse...

But then again, I am somewhat of a dreamer.

Aspen Ideas Festival - President Clinton

Here are my notes from President Clinton's excellent speech at the Aspen Ideas Festival. Also, if you are interested here is a video of the speech: A Conversation with President William J. Clinton. I should also note (due to a comment below) that these notes, while extensive, are obviously incomplete.

Intelligence and effort are evenly distributed. Systems are more important than we think. You would be shocked if the lights went off.
In the developing world you can't take that for granted.

Mr. Powell was able to succeed because there was a system that was predictable.

We need to create systems that are predictable that allow them a chance to understand the outcomes of their effort - we need to give every child an "arc" for their effort.

How important is ingenuity?

It is very important. Premise of military - leaders are made as well as born.

Leadership matters.

Kyoto.

Many did sign it. 155 countries had to try to reach Kyoto targets.

6 to 8 will make it.

Leaders were not willing to stay poor.

To mobilize the economic resources of the country to make money.

Denmark, UK and others treated it as an opportunity to make money and they have done well.

Why don't we capture the wind between Texas and Canada.

Leadership is important but not enough. You need systems also.

Mr. Mandela

Mr. Mandela gave up his own freedom to prove that Freedom is a Universal commodity. He invited all of the leaders of his oppressors into his government because he knew that he needed them. You don't have to be in office to do public service. You can do it as a private citizen - used his stature to help others even later in life. He showed us all how to live. When he was released, "I felt anger, and hatred and fear, when I left, I let go of the hatred because I wanted to be free".
Every living soul on the planet has a justified reason to be angry.
He disciplined his mind and heart and spirit to overcome it every day.
What will happen in the aftermath of Mugabe's going?
Mr. Mandela gives us a universal lesson: we should all live from a place from forgiveness.
Itzak Rabin the other greatest person he ever knew.

HIV AIDS.
2002 AIDS conference in Barcelona - if you were rich you could get meds. 6mm needed it but only 200k could get it.
Mr. Mandela saw what was needed. He told a story about a young woman who had AIDS, and he paid for this woman's medicine. He had no connection to her, he wanted her to be a beacon.
Mr. Mandella said: this is what you should be doing.
Mr. Clinton realized this was important. Started doing it. 2.8 mm take medicine now. 1.4mm from Clinton-negotiated contracts.

Generic Drugs,
Cut the price structure for all drugs by driving up volumes. (got kids drugs from $600 to $60). Chris and Jamie Cooper Hahn negotiated a deal to do more.
Best thing the French have done - created a minor charge on intl flights - this money is used to fight problems for kids globally.
Did the same thing with fertilizer in Rwanda and Malawi...similar things with building equipment.
Simple change in business models can do a lot.

Food Crisis
Within 30 years if not before, people will be consuming more local produce (within 150 miles of home). Agricultural self-sufficiency is a national security issue and energy issue.

Alliance for a Green Revolution in Africa
When you change productivity, there are issues but we need to increase productivity here.
1 - replicate results of millenium development initiatives and
2 - change the way we deliver food aid. Now, has to be grown in America and delivered by American flag ships. Canada gives cash close to crisis. President Bush has been trying to do this here, but the Dems and Republicans are holding it back. Crazy that people are fighting this.

GMO Crops - safety is important. Let people continue to debate the issue. Look at the evidence and see what the data tells us. There are a lot of unanswered questions here. We should win the debate in an old-fashioned and honorable way.
One new experience - we have tripled the number of people who have autism in 15 years. No one knows why.
Mr. Clinton was shocked. Doesn't know what the answer is here.

Climate. What should we do to retrofit cities? Are "green jobs" an opportunity?
Almost 75 percent of greenhouse gas emissions are emitted in the U.S.
We should pick the low hanging fruit.
If the U.S. India, China and Russia were to reach Japanese levels of efficiency, we would be 25 percent of the way to 80 percent reduction.
Low hanging fruit is in efficiency.
We should look for systematic ways to change things.
Only $5b in the whole world was being used for retrofits - raised more than that in a day and now have started with public and now moving to private to analyze and determine what best low-hanging fruit initiatives. For instance, NYC public housing, cutting annual cost from $500 mm to 350 mm per year. Energy Service Organization guarantees underwriting of these projects and banks will fund this with the proceeds from energy savings go to service debt.
Sears Tower, etc. are doing this. Jim Rogers (Duke Power) says everyone should offer this because it will allow the power companies to better utilize existing system. Just use current stuff more efficiently - can prevent building new power plants.

The money is there to be made, we are not organized to make it.

This is not just a thing for the rich. Ethiopia can grow sugar just like Brazil.

Everybody can do it and make money out of it.

Thomas Jefferson said: Education is the bedrock of Democracy.
World - everything we want to do is complicated by the massive urban population growth. Given the various issues around controlling population growth, the most clear way to do this is to put every single girl in the world in school. 60 percent of the unschooled are girls.
If you put them in school and give them access to work, there is always a reduction in birth rates.
Key: support education of girls.
In America, we have great colleges and universities and not as good at k-12.
We have most diverse classrooms (by any metric), and we have made up the delta by sending tons of people to college, having immigration, and other issues.
We should not continue to dump more money into bad schools.
Issues: leadership and governance
We are good at 4th grade level. Gap emerges at 8th grade level and then splits massively.
Sure there are lots of social issues.
We need to move towards local operational control, but national movement for better trained and compensated teachers, real oversight for Superintendants and Principals.
We should move to a more generalized national test. Needs to be a national crusade.
We need to go more school, pay teachers more and remove beaurocracy.
Find the 20 schools that are great and replicate it.
We have stubbornly refused to replicate excellence and we are paying the price.
Spirit of Optimism.
Next generation has an idealism. What do you see in my generation?
Be optimistic.
Climate Change - something bad is gonna happen, but we don't know when. Something like this is always lurking.

The young generation is the most connected to the internet, the most active socially through NGO's and other, he has never seen this many motivated young people.

Every young person should recognize that this is not an "option".
In an interdependent world, every citizen, the definition of citizenship will include: What can you do to join with likeminded people to do Good in the world?
Public service is key to citizenship.
If we do it, I am optimistic.

These problems are hard. They require dialogue. It is easy to say "we hate the Taliban". We can

Book recommendation: The Big Sort, Bill a Texan.

We are becoming more isolated in our debates because we are able to self-select into likeminded groups.

In 1976, very close election...there was a raging debate about who should win, and very few had 20 percent margin of victory. Were trying to build a national debate. In 2004, 48 percent of the counties voted by a 20 percent margin (a developer recently created a gated community).

One piece of advice to young people.
Do public service with someone who looks and thinks differently than you.
Be worried about the increase in inequality. 90 percent of the benefits have just gone to 10 percent of us. Think about those who are desparate. Don't get smug about how enlightened we are.

Sent via BlackBerry from T-Mobile

Aspen Ideas Festival - Web 2.0 and the Future of the Internet

I just left a panel discussion on the challenges of the future of the Internet and how the government might be able to address it.

The most promising data point from the talk came after it was over. Clay Shirky told me that the Navy Seals are using a mashup of Twitter, Google Maps and Facebook to track the status of operations.

Here are the notes from the panel.
Shirky - Internet Guru and author of Here Comes Everybody.
Fran Townsend - former Homeland Security chair
Paul Tumi - President of ICANN

What they mean by web 2.0 - new forms of social interaction. "future of a webbed community"

Tensions - preserve "open" internet as a conduit for global commerce and prevent identity theft, protection of intellectual property and internet. Sustain dominance, etc.

Previous revolution - industrial revolution - key outcome, ability to wage war on a global basis.

Information revolution - what are global "war type" issues emerging out of this.

Shirky - dissolution of cyberspace. Among the population of grad students. It is seeping into everything we do - partly mediated and partly not.
Augmenting of the "real world" by a smear of cyber and not.
Transition not from A to B, but instead from one to many.
Society is becoming less predictable. More like the physics of weather than the physics of gravity.

Obama has run into a pt where individuals would want more influence - we know it, just not when.

Paul - Internet is going Asia.

73 percent penetration here. 14 percent in Asia and it is growing at triple the rate.

Internet has developed a view that is global, but over next 5 to 10 years, how to you deal with Asia?

3 layers of the internet. 1 transit - telecoms and pipes, 2 - routing and addressing, 3 - applications and content. Level 3 is the most controversial.

Fran - token "non geek" on the panel. Responsible for cyber security policy as related to the government.
President signed a directive saying we will have a better understanding of intrusions, and investigative capabilities, but this is focused on govt getting its own house in order.$7.2 B budget here. Government knows this is important. So far hackers / enemies have not used it to infiltrate or attack. Instead using it for media / propaganda and pictures. Govt is focused on vulnerability of information systems. FBI agent got info and sold it. Govt has its own internal IS problems. Both before and after it is "connected" to the Internet.
Security must have redundancy, etc. Must manage risk.
Paul - who controls it. No one. It is a spider's web on steroids. ICANN regulates .com and IP systems. In terms of security, the Internet is always a dialogue between me and someone else. Key is supply chains.
Analogy to public health - it is an ecosystem.
Benefits outweigh the costs. Risk management is important here.
Private sector has to take care of this themselves.
Fran.
People need to fundamentally change the way they look at risk.
Estonia last year - series of attacks that brought them to their knees.
Could this happen to the US?
Paul - yes.
Concentration in Estonia made it easier. This isn't unique.
Fran - not just a security issue. It is a redundancy and resiliency issue.
Government alone can't deal with this.
Must be more than this.
Shirky - horseless carriage? No. Most actors are not states.
Many groups are more powerful than many states.
War footing around Estonia?
Not really. Under attack is not necessarily about one state to another.
Many more groups can become powerful and act now.
How do you attribute attacks then?
Shirky -
"letters of mark and reprisal" - pirates were ok if we get a cut.
Licensing and supporting groups...as analogy.
When an attack happens. Do I know these people? Can I attribute them?
If I can't, this is a big issue.
Fran -
Attribution is a challenge. Is it a "State"? If not, how for we respond?
Paul - Fire drill analogy.
"Risk" analysis.
Public people have more risk because they are public targets.
Issue - private actors don't get it.
Lots of people bring laptops into foreign countries and their data gets hacked.
Loss of IP is a big issue here.
Trends:
Shirky -
Advantage - explosion of creativity. Site of Leggo figurine mod-ing community. They love what the do. Doing it worldwide at no cost. Multiplied by a billion. Is massive.

Household economics - parents feed their children for free. Household economics going global. People sharing because they like it.

Paul - Internet is the ultimate expression of American Values. Bottom up, free expression of democratic values. Impact around the world that people inside the beltway don't get.

China - internet has become the social dialogue of china. More users than the US. They are using it to find what the people want / need. Dialogue between the community and government.

One of the worst things that could happen would be to try to slow it down.

Fran -
There is almost no risk of US trying to control it.
Have been (for 15 yrs) collaborating. Better approach is to understand and navigate it.

Q+A - our computers got stolen.
How much technology does the government really have?
Government laughs at 24. Govt suffers from Hollywood's interpretation.
Shirky - intelligence community opening up. Key issue - can't even retain people.

What the government needs is a "Manhattan-like project"
Need to have a big announcement and grow it.

Attribution?

Paul - whois? How much should we use this? But problem is that it is very expensive and hard to maintain this system. But also European Privacy commission...you can't track me!
That is just at the domain name level.

No "Secretary of Communications" in our country.

Maybe a privacy director.

Every group in govt has a privacy - bipartisan board.

Paul - you only have 4 to 8 years left. China is going to be massive soon.
Bidu over Google, etc.
If you are going to cement in these values - you only have a short period of time to have power here.

Shirky - people are now writing about "near future" fiction.
Things go from "gee whiz to go hum" fast.
Aggregating "collective intelligence" will be on fire.

Aggregations of data - same thing.

Mobility is the future. How do we do adapt to this?

8 mm handsets per month in India and 4 mm in Egypt.

Government using open source?

They are already. Will do it more. Invested $100's of mm of dollars on open source initiatives. Public discussion of this has taken place and will continue. Because it is more cost-effective.

Multiple internets?
Yes. This already exists. Question is how different this becomes?

Groups already create their own networks but they can't compete with main internet.

Problem is protocol and cross platform communication.

Eastern European - advertising excludes those who aren't advertised to?
Is it going to be forever closed?
No. Closed people will be losers.
Only group large enough to ensure openness is everybody.
Net Neutrality - need competition on local industry aggregation by service providers.

Imbedded devices?
Adam greenfield - EveryWear.

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