The computer revolution: history, benefits, and risks in modern society

¶ … Computerization

Background and History of Computers in Society

The Computer Revolution

The history of "computing" goes back thousands of years to the ancient Chinese (and other) cultures and their mechanical abacus-like tools for keeping track of large numbers in connection with ancient commerce and trade. By the Middle Ages, maritime merchants navigated the open ocean with the help of mechanical instruments that plotted courses in relation to the stars (Evans, 2004; Kaku, 1997).

Modern computer evolution began in earnest during World War II, in connection with the room-sized vacuum-tube computers developed to help the national effort to produce the atomic bomb that ended the war in 1945 (Kaku, 1997). Those first generations of computers required many thousands of glass vacuum tubes and ticker tape or punch cards and were capable of only a very small number of calculations at a time. Two decades later, computers had replace vacuum tubes with transistor technology that reduced their size and increased their processing power enough to conduct complex calculations and put men into orbit and eventually land on the moon in 1969 (Kaku, 1997).

By today's standards, even those Apollo-era NASA computers were no more powerful than a cheap modern-day electronic wrist watch or calculator (Kaku, 1997). In the 1970s, computers were beginning to be incorporated into the scientific sector and large business organizations, although primarily in the data processing and storage capacity; at that time, only the military pursued the potential of computers for the communications purposes that lead directly to the development of the modern Internet (Kaku, 1997; Larsen, 2007).

Within a few years after the introduction of affordable personal computers in the early 1990s, the Internet (then called, the "World Wide Web") revolutionized professional communications, business management, and personal communications (Evans, 2004). Today, virtually every aspect of modern life involves computers in some form (Kaku, 1997; Larsen, 2007). Undoubtedly, the societal benefits have been so many and so varied that they are almost uncountable. On the other hand, the increased reliance of society on computer technologies also introduces the prospect of an equally wide range and number of potential problems and risks associated with computers.

Benefits of Computerization

The computer revolution has completely revolutionized modern society. It now provides the technological basis of communications technology, modern media, transportation, engineering, biological and physical sciences, information analysis, storage, and retrieval, military and law enforcement operations and capabilities, retail and supply chain management, and education to list just a relatively few general areas (Kaku, 1997).

Risks of Computerization

Another result of the computer revolution is its capacity for potential risks and complications in any application that has become dependent on computer processes. Computer technology can also be exploited for criminal and terrorist purposes, generating something of an "arms race" between various stakeholders such as criminals and terrorists on one side and law enforcement and national security agencies on the other (Larsen, 2007; Mills & Byun, 2006).

The Financial Service Industry

A few years after the introduction and widespread incorporation of computer technology to modern business processes in the early 1970s, applications developed on first Wall Street and later throughout the worldwide financial sector transformed stock market transactions and international banking systems, making them far more complex than they were already. By the mid-1980s, investment and trading firms had given control of their most important transactions to post-graduate physicists and mathematicians who created complicated logarithms and modeling programs incapable of being understood by even the highest levels of professional in finance who ran the largest financial services companies in the world (Bhide, 2009; Nocera, 2009).

The modern-era computer processes allowed 24-hour, round-the-clock financial services programming and stock market trading transactions in tremendously large numbers of simultaneous complex calculations of modern instantaneous intercontinental stock trades. Likewise, computer applications and operational capabilities permitted the development of incredibly complicated commercial transactions that became the backbone of the U.S. investment banking industry in the 1990s (Nocera, 2009). Meanwhile the roughly simultaneous deregulation of the financial services industries during the Clinton administration greatly reduced oversight of various sub-industries, such as the mortgage and loan industry in particular (Lowenstein, 2007). A combination of factors including the development of an artificial private real estate "bubble," consumer behavior, unethical mortgage and loan practices, and the reliance of the financial services market on home values ultimately triggered the collapse of the U.S. economy in 2008 after the bursting of the housing bubble caused the failure of some of the nation's largest and oldest Wall Street firms (Bhide, 2009; Nocera, 2009).

Literature Review

General Benefits and Risks of the Computer Revolution to Modern Society

Michio Kaku is a physicist and a prolific science fiction author. His 1997 work, Visions: How Science Will Revolutionize the 21st Century is a nonfiction science book that traces the history of modern science. Kaku provides extremely detailed predictions of the future stages of human technological progress for the next several decades as well as centuries in the future, based on his understanding of scientific research and technological evolution. In the twelve years since its publication, Dr. Kaku's predictions for the last decade have proven tremendously accurate across a broad range of beneficial technological applications of computer technology in particular.

They Made America (Evans, 2004) is a more detailed historical account of the entire history of science that provides dates and very specific information about every established field of modern science dating back to antiquity. In Our Own Worst Enemy: Asking the Right Questions About Security to Protect You, Your Family, and America (Larsen, 2007), retired U.S. Air Force Colonel and national security expert Randall Larsen of the Harvard School of Government and the U.S. Defense University and Military College explains the many ways that the same computer technology that provides undeniable societal benefits also represent potential for catastrophic circumstances associated with their failure or deliberate sabotage or malicious infiltration.

The Verizon Security Team conducted a comprehensive review of cyber threats to security networks throughout professional business computer networks in 2008 (Baker, Hylender, & Valentine) and published their findings in Verizon Business Data Breach Investigation Report (Baker, Hylender, & Valentine, 2008). That report detailed the tremendous extent to which the security of modern computer networks is routinely compromised by malicious infiltration. Dr. Larsen (2007) details similar information as well as parallel reports of the vulnerability of the nation's most important and sophisticated military and other highly classified computer systems.

The Federal Bureau of Investigations (FBI) publishes the FBI Law Enforcement Bulletin, an unclassified monthly periodical for law enforcement authorities and officers. The lead article in its 2007 issue, "The Social Security Card Application Process: Identity and Credit Card Fraud Issues" (Ballezza, 2007) explains the way that computer technology intended for legitimate commercial transactions has been exploited by organized criminals for the purpose of financial fraud. Similarly, the article "Cybercrimes against Consumers: Could Biometric Technology Be the Solution?" (Mills & Byuns, 2006) that appeared in the Internet Computing Journal, IEEE explains how biometric technology is being developed to counter the continual threat of malicious attacks on Information Technology (IT) systems.

Computerization of Financial Services and the 2008 Economic Crisis

The literature tracing the incorporation of computer technology into modern business operations and commercial transactions includes Dr. Larsen's (2007) account of the complex dependence of modern American society and that of other First-World international societies. A New York Times retrospective analysis of the 2008 economic crisis entitled "Risk Mismanagement: Were the Measures Used to Evaluate Wall

Street Trades Flawed?" (Nocera, 2009), explains the way that the evolution of complex mathematics and computer modeling applications completely transformed the financial services and stock market industries in ways that invited problems and unanticipated risks.

Likewise, a Business Week analysis (Bhide, 2009) entitled "Why Bankers Got So Reckless" outlines the manner in which complex computer applications in Wall Street investment banking firms directly gave rise to the dangerously unstable interrelationship between mortgage lending and commercial transactions in the financial services and futures markets. Maria Bartiromo (2009) of Business Week published an interview with Historian Richard Nixon Smith on the 2008 collapse of major American financial institutions and the government's response entitled "Facetime: 'Historian Richard Norton Smith on Obama and the Economy.'

Time Magazine published "America's No.1 Export" (Fox, 2008), that explained how these changes in modern American business have made extending credit, the resulting debt, the processes of administrating and trading of debt the primary business "industry" in the U.S., substantially replacing the actual production of tangible goods and services. An earlier New York Times article, "Subprime Time: How Did Home Ownership Become So Rickety?" (Lowenstein, 2007). That same year, U.S. News & World

Report published a related article, "Yes, Housing Will Get Worse. But How Bad?" (Markels, 2007).

Illustrative Case Study Discussion -- The U.S. Economic Crisis of 2008

A Perfect Storm: Computerization, Complexity, Greed, and Unethical Business

One of the unintended consequences of the evolution of mortgage-backed securities in investment banking was that it eliminated the primary mechanism that had maintained the integrity of the real estate market and the mortgage system. Specifically, banks, lending institutions, and mortgage brokers traditionally extended credit to home buyers very carefully and only after a thorough review of the financial qualifications of those prospective lenders to ensure against their default (Bhide, 2009; Lowenstein, 2007). When homeowners default on their mortgages, the mortgage debt holder loses money because their profit is strictly a function of the interest and financing charges they apply to mortgage loans as the price of extending their credit. For this reason, lenders have always been extremely diligent about "vetting" prospective borrowers (Markels, 2007; Lowenstein, 2007).

The introduction of negotiable (tradable) mortgage-backed securities changed that entire relationship, simply because the original lending institutions typically no longer held onto those mortgage debts for more than a few months, weeks, or even days, before they sold the financial obligations that mortgages represent to investment banks (Bhide, 2009; Lowenstein, 2007; Markels, 2007). As a result, the original lenders no longer had any reason or financial incentive to be careful about who their borrowers were (Nocera, 2009).

Unlike the situation where a defaulting debtor costs the lender money, the process that emerged was that lenders could extend mortgage credit to just about anyone without worrying about whether or not the loan would eventually be paid off over decades as agreed or go just into default within several years of being issued. The fact that mortgage lenders could sell those obligations almost as soon as they were created meant the more mortgages they could sell, the more money they would make, and all without any concern about the qualifications of their lenders (Bhide, 2009; Lowenstein, 2007; Markels, 2007).

Mortgage brokers and real estate brokers have traditionally worked on commissions, earning more when they sell more homes. Once the lending institutions stopped caring about who borrowed money from them, mortgage brokers and real estate brokers throughout the country began selling homes much more aggressively, recruiting purchasers with no-interest loan offers (Lowenstein, 2007). In many cases, brokers and real estate agents actually coached prospective lenders exactly how to lie on their loan applications by inflating their income and their net worth to qualify for mortgage loans on homes far beyond their means to pay off. The so-called "no-doc" loan (for "no documentation") became standard practice throughout the industry (Lowenstein, 2007; Markels, 2007).

In fact, the practice became so widespread in the industry that brokers and bankers routinely referred to those transactions as "liar loans" (Bhide, 2009; Markels, 2007). Even worse, many real estate agents and mortgage brokers purposely misrepresented the terms of mortgage loans to unsophisticated borrowers, such as through the variable-rate mortgage. That mechanism is a mortgage obligation that provides an extremely low "introductory" monthly payment very similar to that traditionally used to entice credit card customers to open new credit accounts or transfer balances from one lender's card to another's (Lowenstein, 2007; Markels, 2007). In countless cases, home buyers were presented with extremely low monthly payments based on the variable mortgage rate concept for very expensive properties. After the first year or two of the life of the loan, the payments increased substantially, and often far beyond what the homeowner could afford (Lowenstein, 2007; Markels, 2007).

At the same time, housing prices were steadily increasing across the country. That was because in the process of securing all of these mortgages without any real concern about the loans they represent being repaid, brokers and borrowers were also overstating the appraised value of those properties (Lowenstein, 2007; Markels, 2007). In many cases, borrowers who could not afford their mortgages in the first place began borrowing additional money against the appraised value of those homes (Lowenstein, 2007; Markels, 2007).

As a result, property values continued to rise artificially, prompting ambitious builders to develop more and more homes, especially in areas with high projected growth such as large areas of California, the Southwest, and the Florida Coast. Furthermore, in many of those areas where housing prices were growing the fastest, a consumer pattern of buying homes and then selling or "flipping" them within the period of the introductory mortgage rate sprouted in which thousands of people purchased homes with no intention of actually living in them. They merely held on to them while their value increased and then resold them a year or two later as substantial profit. Many homes doubled or tripled in their appraised value in only a few years, increasing in price with every "flip" (Lowenstein, 2007; Markels, 2007).

Beginning in late 2006 and early 2007, analysts had begun issuing warnings about the possible consequences of this artificially inflated housing market (Lowenstein, 2007; Markels, 2007). Their concern was precisely that the artificial increase in housing prices and the resulting housing boom and "bubble" was not capable of being sustained indefinitely and that the nationwide increase in property development and home building would inevitably lead to an oversupply of homes.

An oversupply in the market would cause home prices to fall in accordance with the traditional economic rules in relation to supply and demand. Eventually, large numbers of homeowners would find themselves stuck with expensive mortgages for homes whose value had fallen far below the amount of their appraisal upon which the mortgage payment rates had been established at the time of the loans (Bartiromo, 2009; Lowenstein, 2007; Markels, 2007).

Ultimately, that is exactly what happened and after the housing bubble finally burst in 2007 so many homeowners began defaulting on their mortgage obligations that many of the mortgage-backed securities that had been absorbed into the financial markets and traded in the highly complex securities developed with the help of computer-based processes pioneered on Wall Street became worthless. By that time, unfortunately, those instruments had been purchased, traded, and invested many times, frequently also becoming absorbed into large retirement funds of hundreds of businesses, credit unions, and municipal pensions (Bartiromo, 2009; Bhide, 2009; Nocera, 2009).

In addition to wiping out thousands of investment portfolios and pension funds, the fallout of the collapse of the housing market and mortgage-backed securities directly caused the failure of some of the country's largest and oldest financial institutions such as Solomon Brothers and Lehman Brothers. Moreover, without substantial government intervention and the emergency funding of other companies that were similarly situated, such as American International Group (AIG), which only managed to avoid the fate of Solomon and Lehman because of the emergency allocation of federal money to prevent further collapse of major financial institutions (Bartiromo, 2009; Bhide, 2009; Nocera, 2009).

Solution

In the aftermath of the housing market collapse, the ruination of the mortgage and loan industry, and the worst American economic depression since the Great Depression era analysts and government regulators identified the root causes of the problem. As a result, Congress and the new presidential administration of Barack Obama had to authorize large sums of federal taxpayer money to stabilize some of the corporate conglomerates that were considered "too big to fail" without causing an even worse national economic crisis and possibly a worldwide depression far worse that the Great Depression that began in 1929 (Bartiromo, 2009; Bhide, 2009; Nocera, 2009).

Measures were also implemented to increase regulation of the types of institutions involved in causing the catastrophe in addition to increased oversight on lending institutions and the practices throughout the financial services and credit industries (Bartiromo, 2009). While the circumstances that destabilized the U.S. housing market were mainly the result of the deterioration of due diligence in lending and unethical business practices throughout the mortgage industry, the entire situation also serves as an undeniable example of the degree to which complex modern computer processes can contribute to serious risks and dangers in society.

Complex computer processes are just as involved in other major aspects of modern society as they have been in the financial services and investment banking industries. Whether potential problems are attributable to human error, unethical practices, deliberate malicious destruction, or even international terrorism, the consequences of the failure of large modern systems could be even more devastating than the 2008 collapse of the U.S. economic system.

Conclusion -- Future Implications of Computer Innovation and Complexity

The example provided by the destruction of the mortgage and loan and investment banking industries and the failure of large financial institutions in 2008 suggests that the complexity of computer processes in modern society holds tremendous potential for harm notwithstanding the undeniable benefits that computer technology has contributed to society. Besides the realm of financial services, computers are responsible for the technologies necessary to support municipal services, institutions of modern biology and medicine, military operations, transportation, retail sales and services, supply chain management, communications media, work, and education.

In law enforcement and counterterrorism, the issue of reliance on computers and their ever-increasing complexity has an even greater importance, precisely because of the dangers associated with terrorist attacks targeting computer networks and infrastructure. Furthermore, the very agencies and authorities responsible for preventing terrorism and responding to disasters (both natural and those caused by the actions of man) rely extensively on computer systems and communications.

Along with the benefits of computer technology in society, there arises a significant responsibility to anticipate the serious consequences of possible disruptions of those services upon which we have come to rely so extensively. In many cases, the greater the benefits and the more powerful the capabilities of modern technology, the greater the magnitude of the risks potentially associated with them. It is therefore advisable to plan for the necessary contingencies well in advance of any possible interruption of computer-based technology and network systems.