Russian Hacking

The media is overly excited about the Russian hacking using the SolarWinds update process. 

First, was it Russia?  It seems likely that it was Russia, but not certain.  Anyone who is good enough to develop the SolarWinds hack would be smart enough to cover his tracks.  He may not have covered them perfectly, and we may be able to track down the hacker, but he may also have successfully covered his tracks.  He could be a Chinese hacker who copied the trademark signatures of the Russian hackers and who routed his hacks through Russian servers or websites.  It could be a hacker anywhere who did the same thing.  It requires computer expertise, but there are a lot of computer geniuses out there, including in the Middle East and Latin America.  I am surprised that no one has mentioned Edward Snowden in connection with the hacking.  He is a computer genius living in Russia who knows American computer security extremely well.  Is it possible that the Russians have gotten some help from him? 

Second, I think that whatever this was, it was not an attack or the start of a war.  It looks more like intelligence gathering and testing of hacking techniques.  The test worked pretty well, since it went undetected for six months, but of course there may be other hacks out there that have been even more successful and have still not been detected.  In any case, nothing major has been damaged.  They have not even emulated the ransomware hackers, who have captured and held important data from hospitals and government offices for ransom.  They have not shut down the electric grid or turned off the water or sewage treatment in any cities. 

I doubt that the hackers knew exactly what organizations they were going to be hacking into.  They knew that SolarWinds had lots of important clients, but they probably weren’t sure exactly which ones they would end up getting access to.  They may have succeeded far beyond their expectations, or it might have gone exactly as planned.  We don’t know.  Were their main targets government agencies, or private companies?  We don’t know.  The fact that the hackers did not steal money indicates to me that they were probably government-backed, and not private citizens hacking for fun and profit. 

Sen. Mitt Romney compared the hack to the US invasion of Iraq, when we took out many of Iraq’s communications hubs with our missiles.  I do not think this is an appropriate comparison.  The hackers did not use their weapons, if indeed they have weapons that could bring down facilities in the US.  It was like developing and demonstrating new missiles, putting the enemy on notice that you have these capabilities and can use them if you choose to.  But they (whoever they are) have not chosen to.  But just as Saddam should have been wary of provoking the US, we should beware of provoking these hackers. 

As nations develop new weapons they often turn to arms control to prevent the new weapons from leading to war.  We don’t have much experience with arms control type agreements for computer hacking, but some of the same principles apply, like Reagan’s maxim, “Trust buy verify.”  I am not sure how you verify an agreement to control hacking.  Bombs and missiles usually need to be tested in the open, where detection by satellites or other means is often possible.  Hackers can experiment on their own internal networks, which may be difficult or impossible for outsiders to monitor.  Of course the best test would be to see if you can penetrate the actual defenses of the country or business you might want to attack in the future. 

Nevertheless, arms control agreements are like speed limits.  Not everyone obeys them, but they set standards of behavior and provide a basis for at least discussing violations, if not definitively proving and punishing them. 

Another complication is non-state actors who hack for their own personal purposes.  It is a lot easier for an individual or small group to hack into a network than it would be for them to develop a bomb or missile.  Governments have developed systems for dealing with violent terrorists that are different from those for dealing with other governments.  We already have criminal penalties for individual hackers although they may be hard to apply to hackers operating from foreign countries. 

I think it is worthwhile to begin discussions of some kind of arms control agreement covering hacking to get some idea of what’s possible and what’s not.  In an ideal world leading tech countries would work together to control individual bad actors and well as to monitor each other’s conduct. 

Asset Inflation

The Fed has decided that creating asset inflation is the best response to the pandemic.  Thus, if you owned a $1 million house before the pandemic, you now probably own a $1.5 million house.  But if you don’t own a house, you will probably never be able to own a house.  If you had a $1 million stock portfolio before the pandemic, you probably now have a $1.5 million portfolio, but if you didn’t own lots of stock before the pandemic, you will probably never be able to own any. 

The Fed has decided the only way to save the US economy is to make the rich richer and starve the poor. 

Healthcare Crisis

The US healthcare system is set up to make money, not to take care of people.  That is one reason why hospitals are having so much trouble dealing with the COVID-19 pandemic. 

To start with, the US limits the number of doctors it trains to keep their salaries high.  It brings in foreign trained, foreign doctors to do the dirty work in emergency rooms and family clinics, so that American doctors can do the highly paid specialist work.  If American medical schools trained more doctors, Americans would have better healthcare.  The focus of doctors on money is illustrated by how many have been implicated in the use – illegal and legal – of painkillers like Oxycontin, how many doctors accept gifts or paid speaking (vacation) opportunities if they prescribe a certain, expensive drug.    

Secondly, American hospitals are set up to maximize profits, not to improve the healthcare they provide.  The buildings, staffing, administration are all organized for profit, not for care.  Just in time inventories and small staffs do not work well for epidemics. 

The health insurance industry adds further distortion to the healthcare business.  It means that consumers don’t care about the cost because insurance pays most of the costs.  All the negotiations are between the insurers and the providers, without any consumer input. 

This business model has left the healthcare industry unprepared for a pandemic where the treatment is not cost effective, i.e., lots of expensive treatment for poor people.  But if the poor people are not treated, they will spread the infection to everybody else.  Most of the patients are old and sick, requiring extensive care, while the virus hardly affects young, healthy people. 

The clearest indication that the American healthcare system is in a mess is the fact that it is one of the main campaign issues in every election.  Obamacare would not be such an issue if the overall healthcare system were not so messed up.  Americans are afraid to criticize their doctors because they fear that if they do, their doctors will let them die screaming in pain.  However, they do criticize the general healthcare system of which the doctors they fear are a critical part.  Healthcare is always the number one issue in elections because people think it is bad. 

Those highly paid, American trained specialists are good at treating the illnesses in which they specialize, orthopedics, cardiology, cancer, etc., but they are less good at keeping their patients heathy, because there’s no money in healthy patients who don’t visit the doctor.  The American healthcare system maximizes treatment, not health.  Healthy patients are bad for doctors’ bank accounts. 

Individual doctors should be aware that they are part of a corrupt system that s not taking care of the American people.  They may be rich financially, but they are ethically poor. 

The Fed and the Bond Market

I worry that the Fed has permanently damaged the bond market.  The bond market has been a relatively stable institution for hundreds of years.  The idea was that people with money would loan it to other, usually poorer people, for things like starting businesses.  In return they would get enough interest to make the risk of the loan worthwhile. If wealthy people did not like the risk outlook, they would demand higher interest, which meant that fewer and fewer borrowers would be willing or able to borrow at the higher rate. 

The Federal Reserve has eliminated the risk in the bond market and thus reduced the interest rate to about zero.  By buying up a substantial part of the entire bond market, it has reduced the risk associated with bonds is almost zero, because the Fed will buy almost anything.  The lenders may not be happy with the interest rate, but they like the security of no risk.  The borrowers like what is essentially free money.  This looks like an ideal situation, but it works only because the US government finances at least part of it.  In essence the Fed pays the risk premium, eventually causing the national debt to skyrocket.  The Fed can also print paper money. At some point printing money should be inflationary.  It may be that currently it is creating asset inflation, driving up the stock market and house prices, while not yet driving up consumer prices.  It may be that consumer inflation is kept down because so many of our consumer products come from China and other Asian countries.  If inflation takes off in Asia, we may quickly feel it here. 

One thing that helps the US is that most international trade is done in dollars.  As long as the dollar is the world’s reserve currency, we are less affected by economic conditions in other countries.  If the US continues to be a spendthrift, running continual huge budget deficits, and printing huge amounts of dollars, then the dollar’s status as the world’s reserve currency may be threatened.  If so, then we become less insulated from vagaries of the world financial markets. 

Basically, interest rates have been zero since the 2008 great recession.  This was when “quantitative easing,” bond buying by the Fed, started, which drove down interest by reducing bond risk.  So far, it seems to be working, but it’s not clear what it means for the long term. 

There may be a price to pay in the future.  Asset inflation of stocks and real estate may worsen income inequality, which is already a problem.  It will solidify and worsen class differences and/or create social unrest.  It might undermine the value of the dollar, which would be good for exporters, but bad for every other sector of the economy, particularly consumers.  Prices of clothes, TVs, computers, etc. will skyrocket. 

So far, though, the Fed’s machinations seem to be working. 

In Friday’s New York Times, Paul Krugman wrote a whole column about the national debt and the future of interest rates without mentioning the Federal Reserve.  His explanation for why interest rates are so low is:

That’s a longish story, probably mainly involving demography and technology. Basically, the private sector doesn’t seem to see many opportunities for productive investment, and savers who have no place else to go are willing to buy government debt even though it doesn’t pay much interest. The important point for current discussion is that government borrowing costs are now very low and likely to stay low for a long time.

So Krugman says interest rates are low because there is nothing worth investing in in the US; so, rich people just buy low-interest bonds.  He doesn’t mention that the Fed is buying bonds like there is no tomorrow.  Then he also says the US government should not be afraid to spend money to deal with the pandemic.  Isn’t that investing, isn’t that the very thing he said was not worth doing because there is nothing to invest in?  His is an unpersuasive argument for doubling the national debt.  

Saturday’s Barron’s “Up & Down Wall Street” column blames the Fed for zero interest rates.  It quotes Mark Grand of B. Riley as saying, “I assert … that you are not getting paid for credit risk….”  Barron’s adds, “This bond-market veteran put the blame on the Fed and other central banks for creating a ‘borrower’s paradise’ and a ‘fixed-income investor’s hell’ by holding interest rates down, in part to help finance the massive fiscal deficits.”

I think Barron’s has a better understanding of the situation than Paul Krugman.