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In the first of three articles we take a look at what happened and how, despite the financial arrangements being characterised as almost immeasurably complicated, it is in fact pretty easy to understand what happened.

According to a great number of articles in the press, one of the most difficult things to understand was the methods used by the financial industry – the phrase “fiendishly complicated” is often used to describe the kinds of trading that went on.  Don’t believe it.  In fact, it’s reasonably easy to understand what they were doing once the jargon is cut out.  It’s the language that’s complicated, and as we’ll see in a later article, deciding what to do now that we’re in such a deep hole is also complicated.  The supposed complexity of the financial markets feels very much like an attempt to camouflage or ignore the simple fact of greed, and the willful ignorance it lead to that generated and perpetuated the crisis.

For example, here are a couple of quick definitions:

Sub-prime mortgages are mortgages that were given to people who, in reality, were very unlikely to be able to afford them.  In The End, Michael Lewis cites the example of a Mexican strawberry picker in Bakersfield, California, who, despite having an income of $14,000 and not being able to speak English was given a mortgage of $720,000.  Some may cry foul at picking the worst possible example, but even if he’d been given a mortgage of $100,000 (more than seven times his salary) it would have been reckless for the lending institution to lead him to believe that he could afford it.  In this case, some may consider that it was up to the strawberry picker to realise that he couldn’t afford it – but who is more likely to know whether a mortgage is sustainable, a bank (who has all the customer’s details) or a customer?  And where does the moral responsibility of banks lie when selling mortgages, if not in lending responsibly?

Mortgage-backed securities are lots of mortgages bundled together (mostly sub-prime) that are sold as an asset.  Basically, this means that someone buys all those mortgages in a single lump, and gets the income from them.  If anyone defaults on their mortgage, the owner of the mortgage can sell the house.  If you believe that house prices are going to rise forever, which was a belief that many of these financial deals were founded on, then this would give a guaranteed and rising income.  If, however, interest rates go up, people start defaulting on their mortgages, and house prices plummet, organisations who own these securities are stuck with something that is also plummeting in value, and no-one wants to buy.

Almost everything that happened is, in fact, that simple.

WHAT HAPPENED?

The End takes in a enormously readable broad sweep of the crisis, from its origins to the endgame.  Written by Michael Lewis, who also wrote an exposé of 1980s Wall Street, Liar’s Poker, he starts by pointing to the fact that this isn’t anything new:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

He goes on to show, through the example of a sceptical investor called Steve Eisman, how a lack of scrutiny was actively enforced in the financial markets:

The second company for which Eisman was given sole responsibility [in his early Wall Street days] was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a prick in a way, but he’s smart and honest and fearless.”

“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

(Another quick definition: hedging is the same as hedging your bets.  You bet big on one result, e.g. a stock price going up, and less on the opposite outcome, e.g. that a stock price will go down (”shorting”).  This way you cut your losses if the deal doesn’t go as expected.  This is the strategy that “hedge funds” got their name from, although the term is applied to a companies with a wide variety of strategies – if they still exist.)

The End follows Steve Eisman’s path through the industry, where he was doing what everyone should have been doing – scrutinising the viability of these financial models.  The more he investigated, the more he realised that the whole system was rotten – and unlike many analysts who said they’d seen the crisis coming, but funnily enough hadn’t seen it clearly enough to put their money where their mouth was, he made a great deal of money by “shorting” companies who were dealing in that market. (”Shorting” is effectively making a bet that a company’s value will go down.  The more it goes down, the more money you make).

An interesting part of this article is when Eisman and his colleagues realised that they were in some ways actually fuelling the crisis.  Companies who Eisman was shorting were happily taking his bets that they would fail, and using it to prop up their faltering mortgage-backed securities.  Although Eisman is the hero of Lewis’ story, and is presented as someone who was incredibly angry about how these companies were playing fast and loose with other people’s money and homes (his “vindication” is that he made lots of money from them), did they stop when they realised that they were helping to fund it?  Well, no.  But at least they had the decency to feel a bit sheepish about it. Right?

The disconnection between people dealing in these financial instruments and people outside the financial sector was shown beautifully in a prescient post-Northern-Rock article from January 2008 by John Lanchester in the London Review of Books, Cityphilia, which is also worth reading for a very clear introduction to the kinds of financial deals that were being made.  Lanchester writes about a friend of his, Tony, who works (or perhaps “worked” might be more appropriate now) in the City, London’s financial district:

Not all City types are vile, obviously. My friend Tony isn’t vile. We have many interests in common and chat easily about all sorts of things. But I’m sometimes made aware of a significant gap between us. It’s a philosophical and practical gap, and it is to do with money. Tony will complain about the price of things – about parking permits, or the cost of the Playstation 3 he’s promised his son – but I’ve begun to wonder if this is a purely formal acknowledgment of the value of money to other people. Tony’s ‘basic’ is £120,000 a year; in a good year he earns a bonus of £500,000. In a very good year he is paid a million pounds. He is polite about this but the details slip out nonetheless. He bought a second home on Ibiza and I was commiserating with his complaints about the usual things (builders, local regulations) until the cost of the house was mentioned: £1.4 million.

A fundamental economic gap of that type does open up a distance between people, however many other things you have in common. He happened once to mention what he (as a head of department) pays new recruits, straight out of university: ‘45k a year, with a bonus of between ten and twelve grand guaranteed.’ I pointed out that in many cases that would mean these 22-year-olds would be earning more than the heads of department in the universities they’d just graduated from. He shrugged and laughed. ‘It is what it is,’ he said. Also, the bottom-performing 10 per cent of people in every department at his firm are sacked every year. He expressed surprise at my surprise. ‘That’s standard,’ he said. ‘I thought everyone did that.’ The moments when I realise Tony and I occupy very different spaces always turn on money and the assumptions built into our attitudes to it.

Lanchester goes on to consider quite how huge the scale of the problem might turn out to be, given the sums invested, although he mistakes opacity for complexity:

Derivatives, in their modern form, are the most powerful and the most complicated financial instruments ever devised. The third crucial thing about them is that they are everywhere. In 2003 the total size of the world economy was $49,000,000,000,000. The total size of the derivatives being traded was $85,000,000,000,000. In other words, derivatives today are worth far, far more than the total economic activity of the planet. More than $1,000,000,000,000 of derivatives are bought and sold every day. Every single thing that can be traded through derivatives, is. In the words of Warren Buffett, the greatest living stock market investor,

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

Many companies which look as if their business is to do other things are in reality in the derivatives business – Enron being the best-known example. Buffett is a derivative-phobe, not least because he prefers to know what’s going on in the companies he invests in, and derivatives make that effectively impossible:

No matter how financially sophisticated you are, you can’t possibly learn from reading the disclosure documents of a derivatives-intensive company what risks lurk in its positions. Indeed, the more you know about derivatives, the less you will feel you can learn from the disclosures normally proffered you. In Darwin’s words, ‘Ignorance more frequently begets confidence than does knowledge.’

The mention of Enron is a sobering reminder of how people can get away with what eventually turn out to be stupid ideas – ideas that people fall for because their greed makes them want to believe in them.  The film Enron, The Smartest Guys In The Room, is a fantastic dissection of the rise and fall of what at one point was considered “the most innovative company in the world” and is highly reccommended viewing.  Made in 2005, the film now seems eerily prescient:

Click here to view the embedded video.

For a bit of light relief, and a link into the idea of managing risk, here’s Andy Hamilton on BBC Radio 4’s comedy panel game The News Quiz, talking about why “innovative” and “banking” are two words that shouldn’t really be put together (for non-British readers, Ladbrokes is a large bookmaking and gambling company).

[See the full post to listen to this audio file]

A good way of looking at the laissez-faire attitude to these financial trades was that the risks were not managed properly – the people and organisations who traded in these instruments did not sufficiently understand the risk of these trades (if they did so at all).  The enforced lack of scrutiny in the markets characterised by Steve Eisman’s early days on Wall Street effectively means that they were blinding themselves to the risk.  Even ratings agencies, whose job it is to tell companies how risky an investment is, were giving AAA ratings, the highest possible, to mortgage-backed securities which consisted of sub-prime mortgages.  An interesting article in the Economist, which perhaps unsurprisingly has continued to be a cheerleader for unregulated markets, is the view of an anonymous risk analyst – someone who is employed by an organisation to advise on whether the risks inherent in a deal are too high.  In Confessions of a Risk Manager he or she describes, yet again, the bias against caution in these institutions.  An interesting aspect of this article is the way that it highlights the fact that the willful blindness to risk mentioned many times above is caused by greed:

In their eyes, we were not earning money for the bank. Worse, we had the power to say no and therefore prevent business from being done. Traders saw us as obstructive and a hindrance to their ability to earn higher bonuses. They did not take kindly to this. Sometimes the relationship between the risk department and the business lines ended in arguments. I often had calls from my own risk managers forewarning me that a senior trader was about to call me to complain about a declined transaction. Most of the time the business line would simply not take no for an answer, especially if the profits were big enough. We, of course, were suspicious, because bigger margins usually meant higher risk. Criticisms that we were being “non-commercial”, “unconstructive” and “obstinate” were not uncommon. It has to be said that the risk department did not always help its cause. Our risk managers, although they had strong analytical skills, were not necessarily good communicators and salesmen. Tactfully explaining why we said no was not our forte. Traders were often exasperated as much by how they were told as by what they were told.

At the root of it all, however, was—and still is—a deeply ingrained flaw in the decision-making process. In contrast to the law, where two sides make an equal-and-opposite argument that is fairly judged, in banks there is always a bias towards one side of the argument. The business line was more focused on getting a transaction approved than on identifying the risks in what it was proposing. The risk factors were a small part of the presentation and always “mitigated”. This made it hard to discourage transactions. If a risk manager said no, he was immediately on a collision course with the business line. The risk thinking therefore leaned towards giving the benefit of the doubt to the risk-takers.

(My emphasis)

And what were the business networks doing while this bubble was inflating (and even while it was bursting)?  Asking tough questions?  Yep, just like The Smartest Guys In The Room showed they asked tough questions of Enron:

Click here to view the embedded video.

So what was happening was this.  Banks were giving mortgages to people who shouldn’t have had had mortgages, because they could charge them high interest rates, and even if they defaulted house prices were rocketing so they’d still make money.  Those mortgages were sold on in batches to other companies as investments, and the income they generated was either from the mortgage payments or sales of defaulted houses.  These investments were rated as AAA investments by the ratings agencies, reinforcing the feeling that they were totally safe, which increased the amount that people would pay for them.  This enabled companies to ignore their risk managers, some of whom were having qualms about the sums being invested.  However, as interest rates were raised by central banks trying to control inflation, house prices started to stall, and people started defaulting on their mortgages.  As this happened the value of the investments – i.e. what investors were willing to pay each other for them – started to fall precipitously, and as they did so it started to become clear that they were worth a great deal less than people had paid for them.  This meant that fewer and fewer people wanted to buy them, until the market in them collapsed entirely and they became effectively worthless.  The banks suddenly owned lots of nothing.

And here’s how it affects the people who haven’t got millions of dollars in bonuses to tide them over.

In the next article in this series, we’ll look at how the financial industry reacted to this, and why, unlike something simpler like a steep rise in oil prices, the financial markets simply collapsed in the face of it – they knew not to trust each other.

Foreclosure photo by Joelogon.

Seeing that I can find no subject specially useful or pleasing – since the men who have come before me have taken for their own every useful or necessary theme – I must do like one who, being poor, comes last to the fair, and can find no other way of providing for himself than by taking all the things already seen by other buyers and not taken but refused by reason of their lesser value. I, then, will load my humble pack with this despised and rejected merchandise, the refuse of so many buyers; and will go about to distribute it, not indeed in great cities, but in the poorer towns, taking such a price as the wares I offer may be worth.

I know that many will call this useless work, and they will be those of whom Demetrius declared that he took no more account of the wind that came out their mouth in words, than that which they expelled from their lower parts: men who desire nothing but material riches and are absolutely devoid of that of wisdom, which is the food and the only true riches of the mind. For so much more worthy as the soul is than the body, so much more noble are the possessions of the soul than those of the body. And often, when I see one of these men take this work in his hand, I wonder that he does not put it to his nose, like a monkey, or ask me if it is something good to eat.

What’s at stake here is not so much the physical / digital book divide, but culture and human psychology: what digital books will do to culture that is expressed through the written word and its environs.  Birkets’ view seems to be based on a pessimistic view of readers – that they would willingly give up their human need for deep context for the sake of convenience.  But I can’t help feeling that the human need for deep context is deep itself.  There may be a period of time when people do give up that context for convenience’s sake.  However, I think that the need for it will start to reassert itself – you don’t miss the water until your well runs dry, but when it does you don’t just sit and die of thirst, you dig a new one.

A comparison might help to explain my optimism.  When we first moved to a village near Frome, Somerset, in the early 1980s, it was a bit of a desert – a supermarket had opened up in the centre of town, which had put family butchers and small shops out of business.  Everyone wanted in on this new phenomenon of cheap convenience, but over time it just wasn’t enough.  The town now has two family butchers, a fruit & veg shop, a weekly farmer’s market, a bustling café and a fantastic delicatessen amongst many other things.  Most of these are luxuries – particularly the café and delicatessen – and Frome is by no means poor compared to other towns.  But I think people eventually felt the emptiness of a shop dedicated purely to cheapness and convenience – people’s needs to feel part of a community, to know that more of their money was going into the local economy, to be offered something new by a shopkeeper, reasserted themselves.

Reading is definitely going to change, and there are lots of issues to contend with – many of which are talked about on the excellent if:book, the blog of the Institute for the Future of the Book.  Some are very basic – the Kindle, for example, only has a black and white screen, so can’t show anything with colour pictures.  However, I recently surprised myself by reading an entire 400-page book on my iPhone on the train from Edinburgh to London (the fantastic Your Name Here available for a suggested $8 as a PDF from Helen DeWitt’s site) and didn’t feel frustrated by the small screen or having to cover part of the text with my finger to scroll.  The current form of deep context will perhaps disappear – but, particularly given the possibilities for audio, video and image opened up by the internet, I’m confident that something else will develop to take its place.

Other interesting sites:

My Own Private Alexandria
textsound
Project Gutenberg
Stanza for iPhone
Readability

Splash image by Nic McPhee

Click here to view the embedded video.

The portrait of Montagu Norman, the governor of the Bank of England from 1920 to 1944, reminded me of a piece from the notebooks of Geoffrey Madan, a well-heeled London socialite with many artistic friends.  (Harold Macmillan, in his introduction to the notebooks, described Madan as having “something of the look of those young men who stand about to no apparent purpose in Renaissance paintings”).

This morning I saw a magnificent sight.  I came up to the City in the Underground rather late, about half-past ten.  At Bond Street a man got in whom I just know, and have spoken to three or four times in my life.

He wore loose clothes, a ringed and jewelled tie, a crumpled black hat.  His general presence made a most distinguished effect, suggesting all manner of romantic things: a Restoration poet, a historic French admiral, a bearded nobleman of Spain – the ideal which everyone would like to think his own great-grandfather  attained, to adapt a famous obituary phrase.  This strange being was in a state of high tension.  He lay back looking half strangled, as it fallen from a great height, or praying to be supported in some heavy trial; darted a glance away, focussing a distant passenger and slowly dropping his chin; glared round with the queer look of a man swelling with laughter and longing to share it with someone else; or groaned aloud in pain.

The carriage was half-full.  A woman rose to get out at a station.  He started and stared in horror, lifting both hands with delicate fingers, and crooning a song as if to calm a child.  Then he fell back, with forehead deeply lined, a flicker of splendid hands, and a magnificent eye very wide open.  Two or three people recognized the Governor of the Bank.  In the inestimable English tradition they smiled faintly, assumed all to be somehow for the best, and let it go at that.The train scraped round the rails at Bank station, and emptied itself.  Last but one, out of the carriage, strolled this enigmatic figure.  He struck out now in some odd rhythm, half-jaunty, half-defiant; bent idly down to peer all round an empty carriage; then slid past a group of people at a double pace: only to halt for a leisurely and mournful study of an advertisement on a wall.  At the end paused again, gazing nobly into the distance, like some fine old Swiss guide watching the signs of a storm.  Soon he strode on and mounted the escalator, alone, like the bridge of a ship, striking a glorious pose – portrait of an admiral in China seas:

Even in the presence of an enemy fleet,
Between the steep cliff and the coming wave.

I thought of the Treasury saying, that the Bank of England acts like a commander in the days before strategy was thought of.

He had no ticket at the bar; and the same instinct which would not stare in the train, would not ask a question as he left the platform.  As well demand a passport from a Czar.  But the ticket was found at last, by its imperial owner, stuck in the band of his soft dark hat.  Sill the drama continued; a chuckle, a tormented backward glance, a sudden scrutiny of forbidden entrances.  At the top, one last proprietary gaze at the vulgar novelties which press on the old symbolic temple of Threadneedle Street.  The traffic was in full flow; it was instantly reined back as he approached: three men saluted.  But the mysterious grandee had already slipped and sauntered out of sight, chin in air.

March 1932

[See the full post to listen to this audio file]

Lucier records himself narrating a text, and then plays the recording back into the room, re-recording it. The new recording is then played back and re-recorded, and this process is repeated. Since all rooms have a characteristic resonance (e.g., between a large hall and a small room), the effect is that certain frequencies are gradually emphasised as they resonate in the room, until eventually the words become unintelligible, replaced by the pure resonant harmonies and tones of the room itself. The recited text describes this process in action – it begins “I am sitting in a room, different from the one you are in now. I am recording the sound of my speaking voice…”, and concludes with, “I regard this activity not so much as a demonstration of a physical fact, but more as a way to smooth out any irregularities my speech might have,” referring to his own stuttering.

Audio from UBUWeb’s Alvin Lucier page
Quote from the good Wikipedia article about Lucier
Alvin Lucier’s official website

Envy is at the root of much racism, against China, against America, against the Jews.

I saw the Chinese spectacle.  The Arabic commentator, in the dress of a sheik, explained to us that the Chinese were using the spectacle to intimidate the world.  It was quite interesting to me how the Chinese adapted the Greek ceremony.  It was as if the far east and the west had joined together and skipped the Arab world.

When the commentators spoke of Arab competitors they spoke of competitors from the “united Arab nation.”  They didn’t speak of them as if they were from individual countries.  The broadcast was from Dubai, of course, and there was no rhetoric of Emirate superiority in sports, the way it was no doubt spoken of in the US.  Again, the key phrase was “Arab unity.”

PanArabism is an interesting movement, often at odds with Islamists, but equally enraged at the existence of Israel.  It is in a spirit of Panarabism that Egyptians would feel personally threatened by Israel and the US, whereas these two countries are doing nothing against Egypt, but rather are giving tons of financial aid.

So actually, all this talk of Arab unity could be read as antisemitic, anti-Chinese (who are trying to intimidate us) and ultimately an expression of one thing: envy.

The Bird's Nest, Beijing

Observing the way that medal tables were displayed in different parts of the world was a microcosm of the differing perspectives on the Beijing Olympics.  The New York Times displayed them in order of total medals, which put the USA at the top.  The official Beijing Olympics website displayed them in order of Golds, then Silvers, then Bronzes, which put the Chinese at the top.  The BBC site could do either, as the strangely-named “Team GB” ended up in fourth whichever way they chose, but opted for the official table layout.  News.com.au also stuck with the official line, even though Australia stood to gain a place by using total medals as the gauge.

But the fundamental problem with any table which uses absolute numbers of medals is that it ignores the most important factors that go to make up those totals: population and wealth.  Australian economist Bill Mitchell has been compiling medal tables based on GDP, population, GDP per capita, gender and other measures for a few Olympics now, and the results give a much better insight into how impressive various countries’ performances were.  Here are a few of the highlights (listed in order from 1st to 5th):

Top five taking GDP into account:

North Korea, Zimbabwe, Mongolia, Jamaica, Georgia

Top five taking population into account:

Jamaica, Bahamas, Iceland, Slovenia, Norway

Top five taking GDP per capita into account:

North Korea, China, Ethiopia, Kenya, Zimbabwe

And here’s where the top five in terms of the official medal table came in the adjusted table (out of the 87 countries that managed to win at least one medal):

Taking GDP into account:

China (44th), USA (72nd), Russia (37th), Great Britain (54th), Germany (61st)

Taking population into account:

China (65th), USA (44th), Russia (36th), Great Britain (22nd), Germany (32nd)

Taking GDP per capita into account:

China (2nd), USA (44th), Russia (36th), Great Britain (22nd), Germany (32nd)

There are full details on Bill’s website, including how he arrived at the calculations (using North Korea’s GDP must have been very close to dividing by zero).  There’s a sense of justice in the fact that, for example, Zimbabwean athletes are up there, given how amazing it is that they managed to make the games at all.

The political atmosphere of the games was bound to linger on and even seeped into national politics – Robert Mugabe awarded a white Zimbabwean swimmer US$100,000 for her four medals and called her “a daughter of Zimbabwe” (she must have been glad it wasn’t in worthless Zimbabwean dollars); the British cyclist Chris Hoy, who won three golds in Beijing, complained of politicians “cashing in” on his success.

But what of Tibet?  What of the Beiing factories closed to clean the air?  What of the promise that by holding the Olympics in China, the Chinese government would start to relax their iron grip on the people and start to be more open?

Shanghai Scrap, a blog written by an American writer living in Shanghai with some interesting coverage of the games, has watched as things start to get back to normal.

Although it is dangerous to draw historical comparisons, as it is easy to take them too far, this is nonetheless eerily reminiscent of the Munich Olympics in 1936, when anti-semitic propaganda, the beating of Jews in the streets and any sign of rubbish, beggars, mangy animals and so on was cleaned from the streets for the duration of the Olympics – and this despite the fact that the Nuremberg Laws, which gave a legal basis for pseudo-scientific discrimination against Jews, had been passed only the year before.  As shown with compelling clarity in the BBC documentary The Thirties in Colour, Germany became the place to go on holiday after the spectacle of the Olympics.  Holidaymakers who went after the games, however, were confronted with the full force of the Nazi’s rabid anti-semitism with Julius Streicher’s Der Stürmer on many street corners.  What will travellers to China see in a year’s time?

Image credit: Shajahan Moidin

Google was started by two Stanford students, Sergey Brin and Larry Page, who shared a common interest in retrieving relevant information from large data sets – their first co-authored paper was called The Anatomy of a Large-Scale Hypertextual Web Search Engine (PDF, 124Kb).  Google now considers its mission “to organise the world’s information and make it universally accessible and useful.”  Note the change from a passive relationship (”searching”) to an active relationship (”organising”) with the content of websites.  They are also very much “in the advertising business”.  (Both quotes are from The Search Party, an interesting article about Google by Ken Auletta in the New Yorker).

Google Adsense works by taking the text content of the page, analysing the discrete blocks of text that we see as “words” and “sentences”, and using them as a way of serving up “relevant” advertisements.  (This blog has them at the bottom right of each page).  The programming techniques that make this happen (”algorithms”), and the secrecy surrounding them, are what has made Google an enormously successful company – their ability to take the text that someone enters and produce adverts and links to sites that they feel like clicking.

But what Google does has nothing to do with language, except in a very dissipated form. Rather than using language as you or I would understand it, Google’s algorithms are simply a form of pattern matching. Search for “car”, and Google will give you results for “car” and “cars”, but not “automobiles”. The inability of Google to understand the meaning of words can produce some strange results. (There are exceptions – searches for medical terms such as “alzheimers” for example, that offer other searches for “symptoms” and “treatment” – but these have to be flagged manually by Google).

Another part of the puzzle is that Google works to a large extent on how people link to other sites. If a website has a large number of links pointing to it with the words “car auctions”, it’s much more likely to turn up on a Google search for “car auctions”. (Although if the site being linked to was actually about My Little Pony and called www.mylittlepony.com, that effect wouldn’t be very strong for obvious reasons – the links, to Google, are a measure of a site’s popularity; but unless the links and the site’s content match up, the effect is reduced a great deal.)

In this crude way, Google starts to understand what most people mean by “car auctions”, and places sites in its results accordingly.

A good example of this effect was what happened to our Google Adsense adverts when Lelyn posted his blog Our Man In Cairo – Bright & Hot about his first impressions of Cairo.  It seemed likely that Google Adsense would pick up on the references to Cairo and offer holidays to the Red Sea and Sharm el Sheikh.  But looking down the list of ads when the page first went live, most of them were adverts like “Meet Sexy Arab Women – Thousands Sexy Women Online Join Free!”

The main words that Adsense is picking up on in Lelyn’s blog are obviously “Arabic” and “Hot”. Put together in that way, combined with the knowledge of the way that Google works and how it ascribes meaning to language, it becomes more obvious how adverts like that appear, and the way that the content of websites determines the way that Google sees the web.

This isn’t just a one-way process however – the effect also feeds back into the way that content is written for the web.

The death of printed newspapers, reported with much hand-wringing by the press, is seemingly not far away. Whether that turns out to be true or not, the sense of panic in Fleet Street is palpable as newspapers fall over each other in the rush for the internet. However, one of the problems with the internet is that it doesn’t pay well. The most common source of revenue on the internet is online advertising – but one million visitors to a site don’t generate nearly as much revenue as one million readers who both pay for the paper and have to sift through the advertisements in it. As documented with unflinching and refreshing clarity in Flat Earth News by Nick Davies (previously featured on this blog in John Lanchester, Riots, terrorism etc.), the decline in print readership has lead to precipitous declines in newspapers’ incomes, which were hardly secure to begin with.

This, combined with website visitors’ increasing ability to shut out adverts when they read sites, means that even the most popular newspaper websites struggle to produce a significant amount of income. Further to which every visitor to the site, whether they click on an advertising link or not, costs the newspaper company money for the bandwidth that they use by requesting pages and their graphics.

For a long time the Guardian website, Guardian Unlimited (now simply guardian.co.uk), seemed to be leading the field.  Whether it actually made any money or not is a moot point. But recently, with enormous fanfare, the Telegraph website telegraph.co.uk rocketed to the top of the list of newspaper sites with the most “unique monthly visitors”. The editor of telegraph.co.uk appeared throughout the media, positively gloating over the online triumph of what is seen as one of Britain’s “quality” newspapers. Rather timid questions were asked about lies, damned lies and statistics, but were robustly brushed off by the Telegraph, and indeed it seemed that the site had actually had a vast increase in visits. Of course the Telegraph’s line in all this was the triumph of quality content in a medium full of trivia – they attributed it to “a string of major news stories – particularly around the credit crunch – and in depth coverage of the Budget, for which it built a micro-site and commissioned exclusive videos on Telegraph TV”.

What ties these two threads together – the way that Google works and telegraph.co.uk’s huge increase in visitors – is provided by this story in the 11th-24th July 2008 edition of Private Eye, which is short enough to quote in full but very enlightening nonetheless:

What is the secret of the Telegraph’s online success, which has propelled it to the top of the pops in Fleet Street in terms of the number of “hits”?

First, news hacks are now sent a memo three or four times a day from the website boffins listing the top subjects being searched in the last few hours on Google. They are then expected to write stories accordingly and / or get as many of those key words into the first part of their story. Hence, if the top stories being Googled are “Britney Spears” and “breast cancer” – hey presto, the hack is duly obliged to file piece about young women “such as Britney Spears” being at risk from breast cancer.

The second new development is to run as many downmarket and sensationalist stories as possible – to the horror of old Telegraph hands (or at least the few who are left) and readers. Since the young guns manning the website neither know nor care what the Telegraph stands for, they bung in whatever grabs their Heat-reading fancy.

Thus a story appeared the other day about the woman with the world’s largest breasts – plus picture – and a man with a rare disease who was “turning into a tree”, again with pics. After complaints from female members of staff, the megaboobs item was eventually taken down – but not before it had earned plenty more “hits” from salivating web-surfers whose tastes are clearly rather different from those of Sir Herbert Gusset.

Here are the two stories:

World’s largest fake breasts – Maxi Mounds – Telegraph (now taken down, here’s the Digg page)

Tree man ‘who grew roots’ may be cured – Telegraph

Each person that visits a site is called a “unique visitor”. But the value of these “visits” differs widely. One visit is counted every time a person visits a website, whether they:

1. Click a link for telegraph.co.uk from Google, decide the page isn’t relevant without having to read much of it and leave straight away or
2. Are a regular visitor, come to the site using a bookmark in their browser, and spend an hour reading numerous news stories from beginning to end or
3. Anywhere in between those two.

(The LoveHowlMuse blog gets a few visitors of the first kind too – mainly people searching for “show me your cunt”, who end up on the blog Selfish Cunt opens for Motorhead – Show me your fucking money). It seems likely that the vast majority of the new visitors to telegraph.co.uk are of the first kind, given the kind of Darwinian survival-at-all-costs tactics that they’ve started to use. They probably don’t tell that to the people who are the targets of the publicity drive, though. Not the readers so much as the people who they really get their money from – companies who place online advertisements.

Clinton’s appearance features heavily in the coverage of her campaign, for example Carl Bernstein’s disgust at her “thick ankles”.  If we’re talking about appearances, what about Obama’s fat lips?  Can you imagine the McCain audience question “How are we going to beat the bitch?”, to which he replied “good question!”, rephrased as “How are we going to beat that black bastard?”  There’s a whiff of suspicion that, admittedly along with other concerns about Clinton, the commentators would prefer a man to win, even if he is black.

Thirty eight years ago, in 1970, Robin Morgan was working for one of the leading counterculture newspapers in New York City, Rat.  Disgusted with the creeping sexism in the paper, she and her female colleagues took over the paper, and for the first female-only edition wrote a celebrated polemic, Goodbye To All That.  Goodbye To All That lamented how the New Left hierarchy, dominated by white men, had simply replaced one form of sexual repression for another, subtler version.  You can read the original article in full on the Fair Use Blog.

Until now she has resisted the temptation to write another version, but the treatment of Clinton by the media has enraged her enough to write Goodbye To All That (#2).  Goodbye To All That (#2) is another polemic, this time about the viciously misogynist media coverage that Clinton has had to endure.  Whether you’re for Clinton, Obama or even McCain, and despite some flaws (Morgan voting for Clinton because Morgan is a woman seems very dubious), this article is a sobering reminder of how far we haven’t come.

You can read the article in full on the Women’s Media Centre website.

“Well they say women shouldn’t be the president

Cause we go crazy from time to time

Well push my button baby

Here I come

Yeah look out baby

I’m at high tide”

Laurie Anderson – Beautiful Red Dress