Cybercrime Predicitions

As is usual around the change of year a number of specialists in all disciplines try to make predictions of what is going to happen in the year to come. And also the ‘security specialists’ have been very active. Before we turn to the actual predictions it may be worthwhile to see what really happened in 2008 in terms of cyber attacks and cyber crimes.

To find evidence we can turn to Bernard Kwok, Senior Vice President, Symantec Asia Pacific

His analysis for what happened during 2008, described as ‘the best of the worst in 2008’ pointed to the following major observations:

1. New Malware Variants and new Families of Threats – millions of distinct threats that mutate as they spread.
2. Fake Applications – ‘Scareware’ – fake secure sw applications that install together with a Trojan horse.
3. Web attacks galore – Symantecs figures point to the web as the prime area for attacks
4. Underground Economy – hard to estimate the real size of this, the investigators claim that in a year they noticed stolen goods traded on the Internet at the value of more than 276 million $, but this is probably only a very small fraction.
5. Data Breaches – this of course includes company specific data as well as public stored personal information. Particularly in UK and US some really extraordinary data losses of public data have been noticed.
6. SPAM – Still very active and annoying, but in fact because of more advanced spam-filters down to some 60-65% of what it was at it’s height
7. Phishing was also a major threat in 2008 – various techniques and baits used in different economies, Obama’s election was but one example.
8. Browser and plug in vulnerabilities – cyber attackers are carefully studying loopholes and vulnerabilities and even if Microsoft Explorer’s total domination may be going away, there are still room for improvement also in other browsers.

Symantec Asia’s forecast for threats in 2009 point at 5 key areas:

1. Explosion of Malware Variants – according to Symantec’s analysis, there is now more malware programs being released on the internet than legitimate programs! This calls for new types of detection programs needed.
2. Web Threats – It is expected that web services will be the next area for introduction of threats. This points toward the need for some certification scheme for web services.
3. The Economic Crisis will give rise to new types of fraud promising people to get rid of their loans or offerings , or maybe web sites promising new jobs. These types of fraud typically hits the weaker and poorer.
4. Social Networks – phishing for username and account info. Based on the rapidly growing success of social networks also as a part of normal enterprise web sites, it is inevitable that more threats will come in this area.
   
   

SPAWAR

Other highly competent sources of knowledge of security threats include SPAWAR – The US Space and Naval Warfare Command Centre in San Diego. Among their tasks they will provide: "…revolutionary information superiority and dispersed, networked force capabilities to deliver unprecedented offensive power, defensive assurance, and operational independence to Joint Force Commanders."

SPAWAR also holds a research center for Cyber Warfare which probably is the best equipped research center in the World. Mike Davis is the Information Assurance (IA) Technical Authority (TA) at TEAM SPAWAR, and a Vice President of the Information Society Security Association.

In a recent meeting, he pointed at the following key trends that he could see:

- Growth of Malware and Botnet attacks - SQL Injections, Denial of Service Attacks – especially in the mobile use!

- Increased number of insider attacks

- Focus on protecting the infrastructure – ICS/PCS/SCADA Attacks (See conferences like this ‘Black Hat’ Event)

- Outsourcing Security Threats including Cloud Computing issues

- Focus on Host based Security

- Increased use of encryption in many more areas than previously

- Regularity Compliance tools and information lock down (PCI Compliance, HIPAA, SOX) and requirements for privacy

- Social sites will be new playing fields for DLP – Data Loss Prevention.

- General move towards ‘information centric security’ with data as the focal point as opposed to the traditional user/application rights management focus.

- More focus on inter-domain SOA-technology and federated security.

SC Magazine

The SC Magazine for Security Professionals published a forecast mainly based on inpur from Sophos:

“What seems certain, concludes the Sophos report, “Security threat report: 2009,” is that the variety and number of attacks will continue to escalate, compromised PCs will remain the primary source of spam, and web insecurity and SQL injections will remain the primary distribution method of malware. “

Infected web pages are cropping up three times as fast this year as compared to last, while the number of infected web pages increased from one every 14 seconds in 2007 to one every 4.5 seconds in 2008, according to Cluley.

“There's a real challenge in how businesses big and small will manage this problem and ensure that their web sites are properly secured and hardened from SQL injection attacks,” he said.

In addition, malicious emails with a greater proportion of legitimate looking attachments, or web links aiming to infect unpatched users, are likely to be sent. Data leakage and identity theft resulting in decreased customer trust and loyalty will continue to pose problems for enterprises, Cluley said.

On the bright side – security software is getting better and more proactive.

For enterprises, Cluley recommended dealing with the security risks with a tiered defense against attacks, including up-to-date anti-virus software, firewalls, security patches and policy control and user education.

In another article from SC Magazine they described the innovations in cybercrime activities under the heading of: 2008: A year of cybercriminal innovation.

And the Danish TeleCom consultant John Strand also had his go at the threats in 2009:

John Strand not surprisingly, points to Wireless risks first:

“Wireless risks continue!
There are so many ways to attack a client system via wireless vulnerabilities, as you can see just by looking at Karma, a set of tools for assessing the security of wireless clients, and karmetasploit, a tool that acts as a wireless access point and responds to all probe requests from wireless clients.

I believe that many organizations are about five years behind the curve when grappling with Wi-Fi threat vectors” ….

“ ..vendors implement new protocols and authentication schemes like TKIP, LEAP and PEAP in different ways. We need to fully research the protocols used by our vendors before implementing them in our organizations.”

But John Strand also predicts that new interest for hackers will be directed to the Operating Systems:

“While operating system attacks have not reached the effectiveness and prominence they had from 2003-2005, malicious hackers will most likely discover operating system vulnerabilities again. There has been a tremendous amount of research over the past few years in browser-based attacks like cross-site scripting (XSS), cross-site request forgery (XSRF) and clickjacking. But what if these techniques were used in conjunction with an operating system vulnerability?”

Finally John Strand points to a possible blind spot in the convergence taking place between Web servers and Browsers.

Ponemon Survey
Also the Ponemon Institution conducted a study – 2008 security Mega Trends Survey – where they concluded the following predictions for 2009:

“Cybercrime and outsourcing were named the top security concerns for 2009. In addition to uncovering a changing view of how IT organizations are becoming less siloed and more collaborative, key findings from the Security Mega Trends Survey include:

• Outsourcing IT is a Major Concern
• Data Breaches and Cybercrime
• Workforce Mobility Contributes to Data Loss
• Web 2.0, P2P, Virtualization and Cloud Computing are Growing in Prevalence “

The Study was conducted by Lumension Security and can be found here.

So the overall picture from all experts – with some variations – points to the same areas or issues. Or is it just that everybody is picking everybody’s brain that this seems so very identical? I will almost be willing to bet that CyberCriminals are more innovative than the sum of all the experts, and that some – until now unseen – types of threat will occur in 2009. With the growing number of computers in everything maybe a new type of crime will be focused on this ‘internet of things’ phenomenon?

The easiest thing of course is to project threats in the areas where you have some remedies and tools to cope with the known – and to sell!.

What we have to fear most is probably not what we know but those areas where we are not even aware of not knowing anything.

IMF awakening to fight the Weapons of Financial Mass Destruction

(Picture: Icelandic SUV's parked after the crisis - source: IMF)

According to a number of speeches from high level officers within the IMF these last few days, IMF has finally realized the magnitude of the financial crises, and at a meeting in Madrid on December 15, the managing director of the Fund, Dominique Strauss-Kahn was cited to have said that the international community would have to come up with at least 2% of the Worlds’ expected total GDP in order to combat the crisis.

A few days before this speech, his first deputy director, John Lipsky, addressed a conference in Steigenberger Hotel, Frankfurt via a Videoconference link from Washington D.C. He stressed the severity and depth of the crisis, loss of consumer confidence and the impact on the emerging economies. He said:

“In November, the IMF revised down its forecast for global growth, less than a month after the publication of its October World Economic Outlook. Based on current policies, the world economy is projected to grow by 2¼ percent in 2009, down from about 5 percent in 2007, before picking up in 2010. The major advanced economies are in recession, and activity is expected to contract by ¼ percent on an annual basis in 2009, marking the first annual contraction in the post-war period for this group of countries.”

The most interesting part of his pitch was the underpinning of the need for what he called a reform of the financial architecture:

“These include the design of financial regulation; the assessment of systemic risk; and creating mechanisms for more effective international action to reduce the risk of crises, and to address them when they occur.

Financial innovation and integration also have increased the speed and extent to which shocks are beingtransmitted across asset classes and countries, and have blurred boundaries, including between systemicnon-systemic institutions. Regulation and supervision, however, remain geared at individual financialadequately consider the systemic and international aspects ofdomestic institutions' actions. ...

The challenge, therefore, is to design new rules and institutions that reduce systemic risks, improve financial intermediation, and properly adjust the perimeter of regulation and supervision, but without imposing unnecessary burdens.”

What John Lipsky is pointing at is that one of the most important powers beyond the speed of of the crisis are the so-called financial derivatives combined with a lack of international assessment of the real risk of these ‘inventions’. He stated that the crisis has underscored the tension between globally active financial institutions and nationally bounded regulators and supervisors.

And his final sentence was:

“Enhanced information provision will also be important for improving the assessment of any build up of systemic risks. This will require reviewing transparency, disclosure and reporting rules. Information requirements will also need to cover a larger set of institutions, from insurance companies to hedge funds and to off-balance sheet entities.”

This very much reflects my own earlier remarks on the need for a complete restructuring and possible combination of IMF, G20 and the World Bank with equal voting rights also for the BRICcountries.

Dominique Strauss-Kahn’s speech in Madrid on December 15 had similar and maybe even more stressing points; the purpose of the meeting was to celebrate Spain’s 50^th anniversary as member of IMF. Dominique Strauss-Kahn said that action is needed on three fronts to prevent the current recession turning into a global depression:

• Coordinated government intervention in financial markets to get credit flowing and support bank recapitalization

• Fiscal measures to offset the abrupt fall in private demand

• Liquidity support for emerging market countries to reduce the adverse effects of the widespread capital outflows triggered by the financial crisis.

In some of the starkest language he has used since the crisis erupted, Strauss-Kahn said governments around the world have endorsed this agenda, most recently at the November meeting of the Group of 20 (G-20) industrialized and emerging market countries in Washington. "Many have begun to implement it. But the actions taken so far are not enough. We need more," he said, according to the text of remarks as prepared for delivery.

According to the most recent IMF forecast, the major advanced economies are expected to contract by ¼ percent on an annual basis in 2009, marking the first annual contraction in the post-war period for this group of countries. But with the effects of the crisis spreading rapidly, IMF First Deputy Managing Director John Lipsky has said that the Fund is likely to revise downward its global forecast when it announces new numbers next month.

"We are facing an unprecedented decline in output, we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures, and we anticipate that the negative growth effects will last for some time. For all of these reasons we are calling for stimulus measures that are large and diversified, and that will last longer than one or two quarters," said Strauss-Kahn.

His main points were that a lot of fiscal measures can be effectively applied to maximize the multiplier effect of different fiscal measures. Actions could include support to housing and finance; transfers to low-income families, greater provision of unemployment benefits, improved tax benefits for low-wage earners, and expansion of benefits and spending on major projects—particularly those that are already planned and could be implemented quickly, as time is everything.
But the IMF would not recommend reduction in corporate tax rates, dividends and capital gains taxes, or special incentives for businesses. "These are likely to be ineffective and difficult to reverse," Strauss-Kahn said. This is quite remarkable considering the pressure on Washington to help the troubled car makers in US. Let us look at the indications from IMF that the real problem behind the crisis might be the so-called derivatives.

Looking into the history of derivatives we find some real horrors – not least in the reason for why they were created in the first place. Of course neither IMF nor any of the heavy weights in the Financial Sector had warned (sufficiently) or earlier against these derivatives, except a few remarkable persons, which I will come back to.

But these days the papers and blogs are filled of stories like this one:

The 58 Trillion $ Elephant in a room

Jesse Essinger has a fine description of what compared to these 58 Trillions $ elephant in a room:

“The history behind the derivatives seems to be an invention by a team of JP Morgan’s top economists around 1995 at a time when Morgan’s books were under pressure; they had reached the practical maximum of guarantees to private companies, and if they extended these credit lines, they would very soon run the risk of crossing the line of solvency according to standard regulation terms.

So the idea that the team came up with was derivatives”

The idea behind the construction is that if you can sell somebody a lottery ticket that the guarantees you issue to a third party company and that other wise should have been shown on your books, now gives you the opportunity to keep your guarantees and credit lines to lenders out of the books, and in this way leverage your equity way beyond what the normal national financial rules would allow. And as you sell these lottery tickets all over the World in a global sweepstake, other financial institutions can make additional lotteries out of the original lottery making it completely impossible to estimate the real risk. The 58 Trillion Dollars is probably on the low side.

Jesse Essinger collected this interesting timeline of the derivatives and what created a need for them: (View an interactive timeline of derivatives.)

What is interesting to note is that it was far down the road before the real poison of the derivatives finally dawned on Wall Street. And Paulson, Treasury Secretary, didn’t recognize it even if the system was collapsing around him. The deal makers continued selling derivatives during the melt down. But somebody did notice the problem behind the derivatives.

As early as in 1998 Long Term Capital Management (“LTCM”) encountered financial difficulties that required a bailout by banks, orchestrated by the Federal Bank of New York. LTCM is now forgotten and the lessons were forgotten surprisingly quickly.

Also this link contains the story of Amaranth: (Edited by Satyajit Das, the author of ‘Traders, Guns & Money’ Buy his book here:

“Amaranth was a multi-strategy hedge fund. Amaranth Advisors started life as a convertible arbitrage fund (a relatively low risk trading activity). The fund was a recent entrant into energy trading – an infinitely more volatile activity. Just before it blew up, the hedge fund had assets of $9.2 billion. Amaranth's investor base is believed to include funds of funds at major investors such as Goldman Sachs, Morgan Stanley, Credit Suisse, Bank of New York, Deutsche Bank and Man Group. Amusingly, Amaranth claimed to have “best-practice” risk management.

Risk Models – Nick Maounis after the losses surfaced, noted: “Although the size of our natural gas exposure was large, we believed, based on input from both our trading desk and the stress testing performed by our energy risk team, that the risk capital ascribed to the natural gas portfolio was sufficient”. It is questionable that the risk models used were appropriate. For example, correlation risk (one of the main risks in relative value trading) is not generally well captured in traditional risk models. A cursory review of the events shows the inherent limitations of the risk models used. Amaranth took approximately 80 trading days to make $ 2 billion through the end of April and approximately 20 trading days to lose $ 1 billion in May 2006. Amaranth also took twelve trading days to lose a reported $4.44 billion through September 18th or a daily average of close to $ 370 million. Further, when the sale of the energy book was announced on Wednesday, 20 September, the losses were approximately $6 billion and the average daily loss for September expanded to $ 420 million per trading day.”

The story of derivatives also contains other names of interest – Robert Reoch and Blythe Masters seem to be the most notorious:

Robert Reoch

Blythe Masters Called: 'The woman that invented the Weapon of financial Mass Destruction'

As the story goes: “In 1997, she and a team developed many of the credit derivatives that were intended to remove risk from companies' balance sheets. The idea was to separate the default risk on loans from the loans themselves. The risk would be moved into an off-balance sheet vehicle. The product was called Bistro, otherwise known as broad index secured trust offering.

In a guide to understanding the instruments she had created, Masters sung their praises: "In bypassing barriers between different classes, maturities, rating categories, debt seniority levels and so on, credit derivatives are creating enormous opportunities to exploit and profit from associated discontinuities in the pricing of credit risk."

The banks argued that by trading credit derivatives of the kind pioneered by Masters, they had spread their risk elsewhere and therefore needed lower reserves to protect against loan defaults. Regulators rolled over and the banks loaned ever more. It was a huge success and the market for credit derivatives grew rapidly.”

Follow this link and read Elana Centors article on Blythe Masters: On the game plan for derivatives:

It is fantastic to read Blythe Masters comment on her invention: “By enhancing liquidity, credit derivatives achieve the financial equivalent of a free lunch, whereby both buyers and sellers of risk benefit from the associated efficiency gains.

But she wasn’t alone – read about: Bill Demchak – co-inventor of derivatives . And learn about Bill Demchak’s status since 2002: See Bill Demchak Forbes notes

Already in 2002 the Market for derivatives was exploding:

“At stake is the unfathomable $56 trillion notional value of derivatives contracts between U.S. commercial banks and counterparties, measured by the Office of the Comptroller of the Currency at the end of 2002. The entire market, around the world, is estimated at over $100 trillion. But such notional amounts--the face amount of the underlying security--are rarely realized”

But also Alan Greenspan: did what he could to let the derivatives go on the run: In 1994, a bi-partisan bill was introduced in Congress to tighten the supervision of the complex and growing derivatives in the banking industry. The bill would have had the regulatory agencies establish standards for capital requirements, disclosure, accounting and examinations and audits. As expected, the banks argued that no new laws were needed. Greenspan sealed the legislation's defeat by testifying that the Fed had the powers it needed and that a taxpayer bailout caused by derivatives was remote.
Read the comments on Forbes here. (“The great Derivatives Melt down”)

As a closing conclusion on these ‘Weapons of Mass Destruction’ (More real than some other WMD) – a PDF from the originator, JP Morgan’s Guide:

JP Morgans Guide to credit derivatives

Where you can read as their conclusion:

“The use of credit derivatives has grown exponentially since the beginning of the decade. Transaction volumes have picked up from the occasional tens of millions of dollars to regular weekly volumes measured in hundreds of millions, if not billions, of dollars. Banks remain among the most active participants, but the end-user base is expanding rapidly to include a broad range of broker-dealers, institutional investors, money managers, hedge funds, insurers, and re-insurers, as well as corporates. Growth in participation and market volume is likely to continue at its current rapid pace, based on the unequivocal contribution credit derivatives are making to efficient risk management, rational credit pricing, and ultimately systemic liquidity. Credit derivatives can offer both the buyer and seller of risk considerable advantages over traditional alternatives and, both as an asset class and a risk management tool, represent an important innovation for global financial markets with the potential to revolutionise the way that credit risk is originated, distributed, measured, and managed.”

Greenland - icy Path to Independence

On November 25. Greenland held a referendum on 'Namminersorneq' – self rule. Many international observers seemed to be slightly misled by this and commented as if the Greenland community won it's independence from Denmark over night.
The purpose of the referendum was to obtain the Greenland Peoples acceptance of a new treaty between the home rule of Greenland and the Danish Government that will replace the current law of home rule from 1978. The content of the new treaty is to define the areas where Greenland step by step could take over the regulatory and administrative areas from Denmark, that is currently not covered by a treaty, which costs that Greenland will have to carry for each of these areas and which economic impact exploitation of oil (believed to be in plenty supply in North-East Greenland) will have on the Danish annual contribution to the Greenland Economy.
It also clarifies that Greenland will have the right to explore natural mineral resources.
But total independence is in no way just around the corner – the realities are too harsh.
The annual Danish contribution is 3.5 billions Dkr – about 590 Mio $, or one third of the Greenland GDP, 2/3 of the Home Rule income. Next year the Greenland fiscal plan has a deficit of 300 Mio Dkr, mainly allocated to investment in infrastructure , new water driven power plants, harbours and other items needed to attract mining industry. (Read Lars Emil Johansen’s comments to the fiscal law for Greenland for 2009 (In Danish))
So there is really not so much available to start financing new areas for many years to come – Police and Legal autonomy is estimated to cost at least 300 Mio Dkr, but the real problem is – as in many sectors – lack of skilled Greenland speaking trained policemen, judges, lawyers, administrators.
What was expected to improve this position has now been postponed for several years: The mines that would contribute to the Greenland economy by taxes on workers and spin off from investments, are faced with ice cold outlook: The Bloomberg metal ad mining index is down to 1/3 compared to spring time, the only working goldmine is closing down because of heavy deficit, and the Alcoa aluminum company that still has a LOI to start building an Aluminum plant once a couple of more power plants are installed, is faced with adverse trends, stopping new investments, closing down some facilities.
So there is not much hope for the Greenland self rule quickly to undertake new areas and being able to pay for it. Even if 75% votes yes.

So the referendum may be only little more than a political victory for the parties in Greenland that advocated for increased self rule. But as such it will be helpful for a more equal partnership with Denmark. The Greenland language will be the national language, Danish and English 2nd
and 3rd. Language. The People of Greenland will be recognized as a separate people according to the International Law. Even many resident Danes in Greenland voted for the acceptance of the treaty, and one of the stated that 'Now the handle is on the inside of the door, they are free to open it at any time!'. Some even expect the requests for support from Denmark from now on will be more realistic.

The strategic importance of Greenland has been clear since 2. World War – the Thule Radar is an important part of the US defense system ever since the Cold War and particularly since Ronald Reagan's 'star wars' project was launched. The latest treaty is dated 2004. A Greenland with substantial oil reserves would of course be even more interesting for US, and there is no doubt that the Greenland politicians are very much aware of their favorable position, particularly the more socialistic IA party would probably have hoped for a faster way to independence – but also very much aware of the risk of ending with a heavy embrace by the American neighbour.
But Greenland is also a symbol of the global warming – Al Gore was early to visit the melting glaciers, the Danish Climate Minister, Conny Hedegaard, enjoys showing her colleagues the glaciers at the Icefjord, now moving at a speed 20 times the speed in 1980'is.
It suddenly dawned on the Greenland political leaders that a part of the new treaty and earlier treaties with Denmark on the climate issues demanded that Greenland stuck to the Danish scheme of reducing the CO2 emissions. This however, may be completely impossible. Where could the savings come from once Alcoa's aluminum plant starts producing CO2 in a volume 20-40 times the current Greenland emission? As the Greenland Industry Association points out, Greenland has not yet become industrialized and should be allowed special treatment. This conflict is going to be interesting with an Obama administration in US and with Denmark hosting the UN climate conference in November in Copenhagen. From both sides the demand for CO2 reduction will be difficult to neglect.

And again, if the aluminum plants are postponed, and mines will be delayed for decades, the financing of increased independence is non-existing, and the best the Greenland Self rule Government can do right now is to invest heavily in education and try to become independent of Danish and other experts in key areas like mining, IT, transportation, construction – and administration.

The current financial crisis has not yet hit Greenland with any strength – I participated in a seminar for the ICT key players in Greenland, Nuuk last week and presented the overall problems with a particular twist on Greenland strategic options that are still open for discussion. The investment in infrastructure has called for the installation of a sea cable, and TeleGreenland expects to open this almost 1 billion Dkr. investment in March 2009. Still the radio stations transmitting the signals along the coast needs additional investments – probably around 100 – 200 Mio Dkr. during the next 5 years. This is a lot for a country of less than 60.000 inhabitants, and the political pressure from the Greenland Government to keep investing is enormous; during the last few years a GPS system for sheep farmers have been built up at a cost of 65.000 Dkr. pr. Sheep farmer. And still Tele Greenland has managed to deliver a surplus to the Home Rule – it’s only owner.

It is ironic to note that at the same time as the educational system and telemedicine suddenly becomes possibilities within reach, the politicians are trying to step in and open broadband connections to everybody as a low priced flat rate. It seems to be a recurring problem in Greenland where political participation in the major industries has been – to put it best – a very close alliance. In this case it would result in drowning the capacity and taking any sort of control out of a professional company management team. The price parameters could in stead be used as a budget support to education and health sector while TeleGreenland build up its capacity - and then eventually adjust rates downwards. Compare with the Tele Company in North West Canada that has been a heavy receiver of subsidies for decades.

But so far TeleGreenland has got its financing in place – next in line may not be so lucky – whether it is Royal Greenland, Umiaq Line, the construction sector, AirGreenland. Tourism will probably soon begin to drop slightly housing is still in short supply in the bigger cities.
In the short run the lower price of oil will benefit the fishing industry, but demand for fish is also likely to drop.
There is no doubt that even if Greenland so far is hiding behind Denmark, the global crisis will be felt. And the first victim will be the mines - and with the mines the hope of early independence.

But the Greenland people will undoubtedly struggle to protect their culture, language. If you have never really encountered this people, listen to this beautiful christmas carol performed by a choir of Greenland women in their traditional dress: Guuterput on Facebook.
Merry Christmas – Santa Claus is highly needed everywhere this year. But remember: He lives in Greenland! I met him at his home last Saturday!

Eurocities Annual General Meeting - Den Hague

Last week I had the pleasure to participate in Eurocities annual general meeting, this year in den Hague. Eurocities is an EU-partnership between 130+ major cities in Europe, and I have for some years had the honour to represent IBM as a coordinator, as IBM is one of 6 sponsors for a sub-orgasation, formerly Telecities now Knowledge Society Forum. Eurocities as an organization has the objective to support cities’ role in EU as one of the most important focus areas for developing high standards of living, dwelling, working.

To this end the Eurocities a year ago adopted the ‘Leipzig Charter’. This charter states that cities should be seen as cornerstones for development of well-being and a sustainable Europe. It calls for integrated approaches to development (breaking down silos between different parts of the public sector and between the public and private organizations and enterprises). It also calls for new governance principles, democratic participation in policy making and supporting citizen entrepreneurship.

To support these objectives the Eurocities conference started by an award ceremony where 3 cities where awarded for their innovative ways to solve some of these challenges:

The Finnish city Espoo won the award for their practice to bring senior citizens in contact with the cities many cultural organizations: music schools performing for elderly, sports facilities with instructors for elderly etc. a very inclusive and heart warming initiative.

The Belgian city of Gent was awarded for a very comprehensive and all-inclusive solution called ‘Gentinfo’ covering all aspects of services and information for citizens from booking books in the library, reserving day care for children, parking spaces, handling complaints and proposals etc.

Newcastle, UK won the third award for a project called ‘Udecide’ – an interesting project to involve citizens in prioritizing the budget and selecting, actually voting, between alternative ways to spend the cities money. There is a detailed study of this project available her: (Case study Udecide)

The ceremony took place in the Haag City Hall, a completely white and beautiful building created in 1995 by the US architect Richard Meier.

The official opening of the AGM took place on Thursday in the old and beautiful Steigenberger Kurhaus in Scheveningen. Mr. Jozias van Aartsen, the mayor of Hague and the next president for Eurocities welcomed the several hundred delegates, followed by Mr. Gerard Collomb, mayor of Lyon, current president and a person that has succeeded in placing the Eurocities agenda very high on the priority list in the EU Parliament and Commission. Also the Dutch Prime Minister, Jan Peter Balkenende, addressed the audience and surprised by describing his first political experiences from a small town close to Amsterdam. Finally, the newly appointed Secretary General, Paul Bevan introduced himself to the audience. He has an exciting career both in EU organizations and in setting up a successful planning cooperation organization in South East England, which he ran for 8 years.

Among other interesting speakers, The EU Commissioner for Competition, Ms. Neelie Kroes, made an interesting speech in the midst of the Financial Crisis, which of course has put a lot of pressure on her and her staff. She stressed that the wise fathers of EU and Jean Monnet in particular already from the outset put into the declaration that State Aid of private companies were forbidden, and could only be tolerated temporarily in case of an identified fault in the market. This has also been a guiding principle in the current support for the European Banks, and it is mandatory, that the EU aid and support MUST be followed by a restructuring. At the end of her speech, the representative from Newcastle rose and praised her flexibility and personal assistance to save the Northern Rock Bank, which would otherwise have put thousand of citizens in Newcastle on the street.

As the conference unfold, the 4 key areas were handled separately in a very intelligent way, as each of the working areas: Living in cities, Well-being, Environment and Health, and Working in cities were treated in break-out sessions, where each group was taken to a part of Den Hague that illustrated the problems in question, showed how this was being addressed by Den Hague, and then finishing off in meeting halls around the city.

The ‘Living’ working group was sent on a sightseeing to see the program ‘New Approach to priority Neighborhood the Hague Zuidwest’, and together with the speakers from Belfast and Rotterdam they discussed the problems of creating balanced residential areas.

The workshop on ‘Well Being’ discussed how diverse ethnical and cultural background could be seen as cohesive rather than a diverting factor in creating global cities with multi ethnical inhabitants. Den Hague has a large number of immigrants representing more than 52 countries, and together with Bristol UK and Barcelona Spain, this topic was discussed intensely.

The ‘Environment and Health’ workgroup, where I participated, drove through an area that was at a point becoming a ghetto – the Transvaal district – but where a lot of initiatives to tear down debris and build new sustainable houses with far less heat consumption and with a nice and attractive design had helped to bring up the standard. The meeting ended in a former church founded by the late queen Juliane. As the inhabitants were now mostly muslims or hindus, this was now a city service center, and the chapels have been transformed into special offices and information desks for citizens. Also the president for Knowledge Society Forum, Dr. Giuseppe Paolo presented – a case of how to avoid problems when allocation mobile sending stations, and the city of Sheffield’s representative presented a very interesting case showing the key influential factors in people’s health, unemployment being one of the major sources of diseases and health care related costs.

The strategic plan for Sheffield seems interesting for many other cities.

The working group on ‘Work’ also passed Transvaal, and the topics of the discussion were how to leverage public-private partnership to create enough jobs also for the unskilled workers and immigrants. This also included having a number of jobs to secure clean and nice local and dwelling areas, even if the jobs were subsidized, this could be shown to pay off in less crime, better quality of living. From Budapest a description on how an Office for Equal Opportunities were created , and how the cooperation between local officials, high quality social services, NGO’s and private participant could help the underprivileged to get jobs, education and housing.

From Poznan a presentation of the Barka-Kofoed Social Integration Centre (Based partly on funding from the Danish Velux Foundation) showed how this benefited unemployed and socially excluded people in the city.

Finally a Working Group on Innovations in Local Government stayed at the centre and discussed the 3 key topics of developing local community participation, how to develop integrated approaches (breaking down silos between departments and institutions) and how to develop multilevel governance. Among the speakers was the representative from Berlin that described the Quartiersmanagement project. Also Istanbul presented My Project Istanbul, a runner-up for the award on cooperation initiatives.

The last day of the conference was among topics devoted to work on an updated version of the Leipzig Declaration, and the next – Den Hague Declaration – will be published shortly, so I will come back to this in a later blog.

The Conference finished by the mayor of Den Hague, now the President of Eurocities, who thanked the participants and the chairs for the various committees/For a that had developed a status of the results from the last year.

I will look forward to the next meetings in Telecities/Knowledge Society Forum, where the more politically oriented topics will be left out and the focus will be on the practical adaptation of IT technology in the key areas of urban life. This is very much in line with IBM’s initiative called ‘A Smarter Planet’, where cities are in focus for a lot of the development during the next decade.

This is a practical way of transforming the IBM vision from ‘Government 2020’.

Rethinking Macro Economics ?

As the crisis that started in August with the market for US sub prime loan collapsing now has gathered a momentum that hasn’t been seen for many decades, a lot of observers and experts have expressed a multitude of suggestions and remedies while financial leaders, regulators and politicians have been working around the clock to try to stem the harsh tides. (See: The Fuel that fed the Subprime Meltdown)

And as the traces have now spread to almost all countries and sectors of the economy it is obvious that new approaches, indeed more than a New Deal is needed. As all major European and Western economies are now more or less in recession, the price of oil has dropped to as low as one third of the price during July, the Bloomberg’s Metals Index likewise down to 1/3 of July, prices for food have dropped to 50% of an all-time high. Stock value of most of the Worlds leading companies down to 50% or below, with a threatening overcapacity in industries like transportation, tourism and an automotive industry on the verge of collapsing, it is about time to stop and wonder how this could happen so fast and with an impact of this enormous magnitude.

There are some obvious and some maybe more hidden reasons why this could happen:
Firstly, the Globalization is the direct reason for the rapid spread of the problems; the first wave due to the Financial derivatives being traded on a World Wide basis much alike re-insurance made the sub-prime loans felt in almost all major financial institutions. (See: Gambling on Derivatives)
Secondly, most of the financial regulatory system – especially, but not only the US ‘Greenspan’ system – has been based on a long, steady period of growth, and has not been geared to any kind of massive drop in values and stock prices; this meant for instance that because of rules on Pension Funds protecting their core capital, they had to sell off bonds or stock in the beginning of the downturn, putting additional pressure on the market.
Thirdly the Globalization now means that all major industries spread the value chain across the continents leading to direct and fast reactions in supplier markets.
Add to this the inefficiency of supra national regulatory and supporting systems. We have seen the G7 gather quickly, but before their decisions, some countries were already trying to implement their own strategies, and even if a somewhat concerted effort was indeed agreed upon, it was still implemented in lots of different ways. And then you could argue, that as OECD has pointed out that only 20% of the Global Economic Growth from 2005 to 2009 comes from the advanced economies, G7 should have been enlarged to, well G20 (See declaration on G20 meeting in Nov. 2008), with lots of negotiation power plus obligations put on the BRIC-countries and developing economies, that still has a promise of positive economic growth in the next couple of years. Looking at the IMF, this institution has only once during the last 10 years being called upon by a Western Country – namely Iceland. So IMF and it’s traditional mission, remedies and requirements before putting any substantial credits on the table, it is hardly a toolbox that is fitted to the complicated advanced economies, that are now suffering.
And likewise, the World Bank has other objectives, to help developing countries.

(Figure: IMF: Real Economic Growth by Market Type, 1997-2013 %)

So what is really wrong and why doesn’t the funds but to the disposal of the financial institutions do the trick? Why isn’t the drop of interest rates in most countries helping us?
One of the reasons I expect is imbedded in the psychology of the intervention packages: As Government officers are now being put in charge of banking operations, we are coming from a situation with lots of risky business with lots of willingness in the financial market to finance risk by spreading it around to a situation now where absolutely NO risk is tolerated; it may be that basic international trading business and associated payments are financed, but funding for new start-ups are likely to disappear completely. The next phase of the downturn will be that Government tax revenue will start to drop as income drops and the unemployment starts to rise.

Going back to Economic history the situation looks almost like described in Karl Marx ‘Das Capital’. His prediction that as the competition between the capitalists is bringing down the ‘value add’, the lack of profit will lead to mass bankruptcies, take over and mergers so that the strong will get even stronger – and finally leading to the collapse of the capitalist system. Only this time we put Government officials on top of the Capitalists – but how can they become efficient bankers? Let alone efficient car makers? Is it a take over by the Proletars? Or will it just lead to more bankruptcies?

The good ol’ macro economic model for aggregate demand will have to be looked at a mega-economic level, as the best idea in the mid term run will be to stimulate demand:

D = C + I + G + (X-M)

(Demand equals Private Consumption plus Investment plus Government Expenditures + Export minus import). The sinister scenario goes like this:

Consumption: Consumers expect prices to fall and keep their money in the pocket, disposable income may come down due to lay offs, consumer credit is being stopped by risk-adverse banks, and as housing values are coming down, there is no easy way to obtain a mortgage credit to finance major items like cars, washing machines etc.
Investment: Probably only most necessary re-investment programs will survive, capital equipment will begin to be worn down, and banks are not allowed to finance any kind of innovative new start ups or new development, unless the needed capital is generated by the companies themselves.
Government expenditure: If Governments are facing cut in tax revenues and rising unemployment and social costs, this will create a short term deficit, but only major investment programs, new infrastructure projects (Going green? Public Transportation instead of cars?) would help.
Exports are likely to drop, particularly exports to the mature western economies. It does help of course, that Import will most likely drop as well.
If we take all of these factors together, we have the classical remedies for a depression spiral.

So indeed the task that the Governments are facing is enormous, the international institutions not fitted for the magnitude of the problem, the need for collaboration and mutual adjustment is immense, and the risk for potential social unrest is looming.

The dynamics of the model is based on expectation; the more likely it is that prices will fall, the more the aggregate demand will be reduced leading to a very vicious spiral. Only short term remedy could be a marked, temporary and international cut in VAT to kick consumers to go out and buy.
It may only be a short term advantage, but it definitely need to be accepted internationally to avoid problems with the balance of trade in some countries.


So where is the hope for a more long range type of solution?
On the institutional side we need to create a supranational regulatory body with power enough to call for collaborative funding and with benevolence enough not to strangle the countries they are helping.
We also need a ‘Bretton Woods’ type of agreement on common rules and regulations for criteria to have solid banks, with well-defined products, have efficient pension fund regulations, establish a transparent market for dealing with and handling risks and international investments, trying to harmonize mortgage systems around the World - and we need to speed up the Doha round to ensure free trade and break down what may remain of restrictions and local subsidies – to food, cars, anything. We need to have an international agreement beyond Sarbanes-Oxley to ensure public insight into all sorts of major businesses, and we need some sort of international court system for fraud committed by international organisations and companies, much like the Haag International Criminal Court.

But all this require transparency and easy access to information. My point is that the more we speed up the velocity of adequate information related to international trade and finance, the more we will be able to expand commerce and trade. If you remember the old quantitative model:

M x V = P x Q

Saying that is a proportionality between the supply of Money times the velocity of Money circulation and the general Price level P times the aggregate production index, Q.
The theory was in various disguises used by Milton Friedman, suggesting that in case of inflation the volume of Money in circulation should be brought down. But maybe we could reformulate this to:

(M x V(m)) x V(i) = k x (P x Q)

Suggesting that the volume of Money multiplied by the Velocity of Money multiplied by the velocity of information in a transparent economy could be stated to be proportional to P x Q, which again is a pseudonym for the National Product. The idea is that the faster the flow of information needed to exchange info business, transfer financial transactions, exchange freight and customs documents, the more transactions will be performed, and the more transactions can actually be funded by the available amount of money. In other words: Speed AND transparency.
This calls for investment in updating management of value chains, updating flow of information between suppliers, manufacturers, consumers and financial institutions. It also calls for fast introduction of open standards for cross national and cross agency communication (See the EU’s Interoperability Framework!) – and first and foremost it calls for transparent semantics on all aspects of trade and finance. UN EDIFACT was just a beginning.

If we accept this, our supra national regulatory body and it’s steering committee (New role for G20?) should as it’s first task to finance a new global infrastructure look at financing a network, a structure and a set of standards and stewardship rules for ensuring transparency along the ideas described above.

Security Outlook for the Middle East – some Comments

A part of our study tour to Dubai with the Danish Press Association described in my former blog, also dealt with security and peace related issues; as we met with the top editors from Gulf News, Emirates Business 24x7, Al Arabya TV and in this respect central observers, Ed O’Sullivan from
MEED – Middle East Business Intelligence and Dr. Mustafa Alani from the Gulf Research Center, we got a very interesting insight into the thinking and current issues in the area.

As the trip took place in the week of the US election, it was of course of particular interest to discuss which influence the new president was expected to have on the situation in the Middle East.
Ed O’Sullivan had a very straightforward view on this: He stated that in his opinion US had never had any proactive strategy for the Middle East – Neither when the state of Israel was created in 1948, when France and Britain tried to overthrow the Egyptian ruler in 1956, when the war broke out between the Arab states and Israel in 1967, nor in the 1990’s. US always seemed to be reacting to some events, only George W. Bush during his second term seemed to have some sort of strategy, but again, he was forced to it because of earlier events.

During the presidential campaign, Obama had been surprisingly silent about the Middle East, probably backed by Clinto experts and former staff. This also explained, why7 Obama suddenly this summer declared that Jerusalem in his opinion should be the undivided capital for Israel! No other president or Western leader had said this, and is was remarked in the Middle East. As the Palestine/Israeli conflict is very close to the minds of all arabs in the Middle East, it wasn’t really a smart draw to name the new staff manager Emanuel Rahm as his Chief of Staff. Except being described by some of his opponents as aggressive and a ‘Cross between a haemorrhoid and a toothache’, seen in a Middle East context his problem is that his father was an active member of the notorious Israeli group, the Irgun before 1948. Also Emanuel volunteered as a soldier in the Israeli army during the first Gulf war in 1991. So no wonder the Israeli papers were full of praise.
The moderate Arabs hope that Obama’s middle name – Hussein – and his last name – Barack, the blessed one – will balance this out, but the fear is that US as always are heavily influenced by the Jewish lobby.

One of the scenarios we discussed was if the conflict between Israel and Iran could result in a situation where Israel actually tried to bomb the Iranian Nuclear plants in a preventive attack.
Ed O’Sullivan’s remark to this was that even if Netanyahu won the Israeli Election, both he and
Rafsanjani need each other as an external enemy picture to keep internal stability; the more pressure on Rafsanjani from the students, and the more instable political situation in Israel, the less likelihood of a real conflict, but the more the 2 leaders needed to expose each other verbally.

One of the more serious, yet mostly unnoticed events in this respect goes back to 2006. At that time, the Secretary-General of the Gulf Cooperation Council, announced the intention of the six members states to establish a joint nuclear research project. Until then all of these states has been firm opponents of nuclear energy and all are signatories to the IAEA safeguard agreement. This act can only be seen as a warning to the international community that something should be done to prevent Iran from producingnuclear weapons. This si one of the issues inherited by Obama.

Another of the real threats to stability in the area of course is the future of Iraq. As Dr. Mustafa Alani pointed out, the current vacuum between the fighting minorities inside of Iraq – Sunnis, Shias, Kurds – and between the Arab world and the Shia-led Iranians – is in fact a Coalition Army of 100.000 top trained soldiers, mostly US. As US has failed to put an Iraqi army together that could be trusted by6 all parties and first and foremost trained, not even an army of 300.000 could prevent a bloodbath is the US troops withdraw too quickly. The various minorities are intermixed, and an ethical cleansing like in the former Yugoslavia could be terrible. The risk of the Iranian Shias teaming up with the Basra Shias could impact the stability of OPEC and indeed the region as such.

One of the questions we had to the Dubai editors and specialists was related to the suspicion, that the enormous wealth in the UAE and the openness of the Dubai Society might attract all sorts of organized crime that could use the financial facilities for laundering and the free port facilities for smuggling – drugs, weapons.
The response we got from almost all of the specialists was that the border control is strict, the police force equipped with up-to-date IT tools and cooperating with the outside World to prevent this, but of course the possibility still existed that the facilities could be misused. The Secure Trade Lane concept is bei8ng installed in the container areas, and financial investigation into fraud seems to be working. As Dr. Mustafa Asani pointed out, none of the bad guys – Al Quaeda and similar – dared to use the banking system any longer, so couriers would be used travelling with large amounts of cash.

Dr. Asani got the question why Dubai didn’t arrest Osama Bin Laden in 1996 when he was thrown out of Sudan and in transit to Pakistan/Afghanistan. He answered that Al Quaeda as such was not really on the top of the list at that time. Although – like CIA – Bin Laden was ‘being followed’. Former events was a partly successful bombing in Aden, Yemen in 1991, but it wasn’t until the bombings of the US Embassies in Kenya and Tanzania in 1998 that Bin Laden was put on the WANTED-list. And in 1996 CIA agents weren’t allowed to kill anybody abroad. That restriction was only lifted after the 9.11 events.

The final major possible threat we discussed was whether or not the Saudi rulers could be counted on to stay in power. Dr. Asani stressed that no real opposition exists in Saudi, and that an internal fight between members of the ruling class is highly unlikely, as everybody in this class has an extraordinary wealth at his disposal. So in his eyes, there is no threat to the Saudi throne. The last person to suggest otherwise, Fred Halliday in his 1971-book ‘Arabia without Sultans’ tried to peddle some Yemenite Marxist visions, but it seems to be extremely far out

The specific Danish issue on the reactions in the Arab World on the printing of the so-called ‘Danish Cartoons’ was a point of discussion with all the editors and specialists, we met.
The issue of course is that it may be hard for a man on the street in an Arabic country to understand why not our Prime Minister could have stepped in, forbidden the printing – or at least have made an excuse. As the Danish press by law is COMPLETELY outside the control of any Government, we sort of expected that this would be the hard thing to bring across. But the editors in Al Arabya seemed to be extremely well informed of the legal situation in Denmark and stated that the reactions had to be seen as a very natural reaction from a lot of Arabs that had felt they were all being accused on being terrorists after 9.11, and that the whole World was against them. These drawings then made the fuse go off. Also the Gulf News team said that they understood the freedom of the press principle, but simply could not understand why these drawings were being produced in a paper, that should have as it’s primary objective to get people of all sorts to work together and not to fight each other. And all editors were likewise puzzled by the necessity to re-print the drawings a second time. There is no reason to doubt, that for most Arabs, Denmark’s reputation have suffered. But for most educated and balanced news people, this is now a past story, and the security level for Danes in the Middle East and in the UAE is unshaken. We are still allowed to enter UAE without Visa.