Paul Jorion's blog

Guest post. Translated from the French by Tim Gupwell.

The debate on growth which is starting to take shape has overshadowed an event which is less spectacular but just as decisive. It concerns the deleveraging of banks, which will have an influence on growth as it is accompanied by a reduction in credit for the economy. The higher the ratio, the less abundant will be the credit. Indeed, the finance ministers adopted last Wednesday a compromise with regard to the adaptation of the prudential regulations of Basel 3 into European law; a basis for the drafting up of a future directive entitled CRD4…..

The battle was fierce between the British and their allies on one side, and the French and Germans on the other. It was a matter of determining under what conditions the regulatory authorities of a country would be able to increase, for the benefit of the banks under their jurisdiction, the core ratio (which expresses the relationship between banks’ capital reserves and liabilities.) The former wanted to be free to do as they wished and to be able to increase it whenever they wanted, intending thereby to gain a competitive advantage, for such a type of supplementary constraint would also have to be respected by all the foreign subsidiaries of the banks present on their territory; in the European case less well placed to increase their capital, leading them inevitably to a reduction of their activities.

Michel Barnier, the European Commissioner, battled hard against a project threatening the single market in his opinion – if each country could independently decide their capital norms – whilst at the same time having to push for the compromise which it was vital to find in the current context. The French and German representatives for their part, by going head to head with the British, highlighted the weak position in which their banks find themselves, and which they still attempt to deny.

The agreement reached is expected to be finalized by the ministers of the 27 member states on the 15^th May, but an even bigger mouthful to swallow is that of the norms for liquidities which measure the banks’ capacity to mobilize resources on a short-term basis in order to meet their obligations. A subject about which they are particularly sensitive in these times of the dysfunctional interbank market and tensions in the repo markets (the enormous market in which they borrow short term liquidities in return for the temporary assignment of their assets as collateral.)

Read the rest of this entry »

An English translation by Bernard Bouvet of the post  “QUESTIONS À RÉSOUDRE (VI) DILEMMES DE LA PROPRIÉTÉ PRIVÉE”.

Private property, as we saw previously, allows you or I to selfishly take advantage of our planet’s generosity towards us and claim ownership of what she bears within her or what she produces spontaneously thanks to the sun, the wind, the rain, and derive a rent from it.

The impact of such an institution is quite obviously unfair. The French Revolution, nonetheless, stopped at its edge. The 1789 Declaration of the Rights of Man and of the Citizen even affirms: “Property being an inviolable and sacred right, no one can be deprived of private usage, if it is not when the public necessity, legally noted, evidently requires it, and under the condition of a just and prior indemnity.”

Gide and Rist comment on the revolutionaries’ attitude in this regard: “The Revolution removed the benefits of caste; it abolished primogeniture (the rights of the first born) which consecrated the children’s’ inequality within the family. But it upheld individual property rights – property rights which confer the most unjust of privileges, the right for the owner to “levy a premium on another’s labour”” (1909 : 247).

What justifies that tolerance towards private property, when no principles can and when its inherited redistribution becomes arbitrary after a few generations?

Private property, according to its proponents, at the very front the Physiocrats such as Richard Cantillon (1680-1734), François Quesnay (1694-1774), or Turgot (1727-1781), stimulates production and wealth creation.

Private property, supposedly, optimally brings out the best in people, first to their own benefit, but above all, in their view, to the benefit of their own children. This the prodding force: the care of their offspring is the motivation that is proposed that brings out the best in people.

But right then the Saint-Simonians protest: admitting that private property permits, to a certain extent, a production’s optimisation thanks to the motivation it provides, inheritance, as far as it is concerned, is counterproductive: the benefits of being productive are undermined if property is transmitted according to the “randomness of birth.”

On this topic Gide and Rist remark with a kind of fatalism: “One can justify inheritance only if one sees it as a strong excitant for the fathers to accumulate capital, – or again, for lack of a rational method, one cannot argue against randomness of birth any more than any other distribution’s method.” 190 251)

Private property officialises the spoliation of the community. Inheritance exaggerates its arbitrariness. Attempts to abolished it have so far proved at best inconclusive, at worst disastrous. Mother Earth has shown tremendous patience until now towards such little idiosyncrasies, but certainly the time is approaching when she will judge enough has been given.

QUESTIONS THAT REMAIN OPEN (V) HOW IS THE AMOUNT OF SURPLUS VALUE DETERMINED

March 7th, 2012 by Paul Jorion | 

An English translation by Jean-Loup Komarower of the post « ÉBULLITION DU MONDE » ET PROPRIÉTÉ PRIVÉE

Two questions have to be resolved initially: is new wealth created in the production of goods and services and if it is, how can its amount and value be determined? In addition, are the opposing parties that in our contemporary world share the newly created wealth all justified in getting a share and if they do, where do they derive this right and what is the conceptual foundation of this right?

We have the first part of an answer: wealth is necessarily created in the production process since it is subsequently consumed.

So far everyone agrees. We also note that several individual human efforts combine but we cannot be sure that some of these have not been contributed in vain. Those perhaps wasteful efforts belong to a type of activity that is useless in order to obtain the observed result, but however useful for the purpose of being rewarded via remuneration.

We also note the contribution of natural resources, such as raw material or energy that can be obtained without work or with minimal work, or readily available resources as for example sunshine, rain or wind.

This capacity of the world to contribute wealth “naturally” is what Georges Bataille called world ebullition in “La part maudite” (1949), translated by Robert Hurley as “The Accursed Share” (1991).

Naturally occurring raw materials like oil or mineral ores are different from sunshine, rain or wind in that they are not renewable, as they are of fossil or purely geological origin, resulting from a lengthy sedimentation process or from the process of formation of our planet by accretion of cosmic matter.

We have however found the way to appropriate this “spontaneous” ebullition of the world by means of the institution of private property. It allows the owner to claim a share of the newly created wealth simply by virtue of a title, a declaration guaranteed by the legal instrumentalities of the community, its judiciary and police force, stating that this part of the ebullition is not simply coming from “the world” but indeed belongs to him or to her.

(to be continued…)

An English translation by Jean-Loup Komarower of the post QUESTIONS À RÉSOUDRE (II) LE PROFIT, SOURCE DE TOUS NOS MAUX

Robert Owen (1771-1858) was a Welsh social reformer, one of the founders of the cooperative movement. As a very early socialist who was blamed for being strictly speaking a “communist”, he considered profit as the source of all our ills. Owen asserted that profit is pure spoliation: workers were robbed of a benefit that should be theirs. Because profit skims part of the value produced by the worker’s labour, it becomes impossible for the latter to be a consumer of the same quantity of goods that he or she has produced. Owen saw profit as purely parasitic. However, if that was truly the case, as a potential opponent may argue, a situation of perfect, unbiased competition should quickly settle the score and reduce profit to zero. Not so, replies Owen: the word “competition” only describes the kind of war being fought, whereas the word “profit” refers to the type of booty. Since profit cannot be justified in any way, it has to be eliminated.

Does it make sense to eliminate profit as Owen advocates? Gide and Rist offer an excellent analysis of this question:

On the other hand there is this objection:

Whenever profit forms part of the cost of production it is impossible to distinguish it from interest. In that case it is true that even perfect competition would not do away with profit, since it will only reduce the price to the level of cost of production. In that case profit cannot be said to be either unjust or parasitic for the product is sold exactly for what it cost.

When profit does not enter into cost of production there is no possibility in confusing it with interest. It is simply the difference between the sale price and the cost of replacing the article. In this it is certainly parasitic, and would disappear under a régime of perfect competition, which must to some extent destroy the monopoly upon which such profit rests (Gide and Rist 1913 : 240).

Can this question be definitely resolved: is profit derived by industrialists and entrepreneurs a reward for service genuinely provided?

(to be continued…)

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Gide, Charles and Charles Rist, A history of economic doctrines from the time of the physiocrats to the present day, Richard R. translator, Boston : D. C. Heath, 2nd edition 1913

An English translation of my post QUESTIONS À RÉSOUDRE (I) TOUS CEUX QUI SONT RÉMUNÉRÉS LE MÉRITENT-ILS VRAIMENT?

There is a question that neeeds to be answered at all costs; 19th century thinkers have devoted much thought towards its solution. Here it is: when we consider rent obtained by a landowner or by the owner of mineral ore extracted from the ground, interest obtained by the owner of capital also known as capitalist, the profit gained by an industrialist or entrepreneur, and the wages paid to a worker, is one of these incomes unjustified and thereby undeserved?

The only point of agreement reached so far is the following: wage-earners truly deserve their earnings, without a shred of a doubt in any case for that part of those wages needed for mere survival. Workers provide their labour and it goes without saying that they should for their own good turn up at work the following day; they therefore deserve without any dispute wages sufficient to survive until tomorrow. For all other types of earnings unfortunately, the answer to that question remains desperately out of reach.

Karl Marx (1818-1883) took up this question from the same point of view as David Ricardo (1772-1823). He simplified the problem radically by asserting that the only justified income are wages: value is created by work and by work only, therefore any other income allocated to other interested parties, such as land owners, “capitalists” as holders of capital, or industrialists as entrepreneurs is undeserved. Marx calls “spoliation” any payment to participants other than workers.

Other 19th century authors, essentially socialist and anarchist thinkers such as Sismondi (1773-1842) or Proudhon (1809-1865), following on the tracks of 18th century economists such as Richard Cantillon (1680s-1734), François Quesnay (1694-1774), or Adam Smith (1723-1790), were of a different opinion. For them several types of advances participate in the production process and each of them deserves as its reward a part of the newly created wealth (*). Thus income ensuing from property rights was according to some authors a reward for work previously performed – sometimes several centuries prior – by some forefather of the current beneficiary; profit accruing to the entrepreneur was a reward for management and supervision of the production process; lastly, interests and dividends collected by the capitalist were compensation for relinquishing control of the loan amount until later.

A solution to such a baffling conundrum remains far from obvious: newly created wealth obviously results from the combination of a number of elements but how can one assess the true contribution of every one of them? The only sure thing is that lacking an unambiguous answer to this question, throughout the ages and until now only the power balance between parties has determined how much every party ends up getting at the end of the day.

(to be continued…)

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(*) See for example what I have to say about the splitting of “parts” in the case of an african dugout canoe used for sea fishing in Le prix 2010 : 145-149

An English translation by Bernard Bouvet of my « QUOI QU’ON FASSE, CE SERA LA MÊME CHOSE ! » of March 11.

77% of you, my dear blog readers, not all of you, but a “comfortable majority” of you, happens to be French. Your country is now in full “election showbiz” mode, and the mainstream media, in the press, on the radio, on television, are full of it, news on why the moment is “crucial” and “how to vote”, are front and centre.

Still, you are perfectly conscious of the fact that whatever which way you vote, either for one of the two candidates facing each other in the second round, or someone else, as a protest vote favouring either the extreme-left or the extreme-right, or a blank vote, or even if you don’t bother voting, all that is of no importance since the result will be the same: either actively or passively, you will elect or help elect a candidate who will either immediately set out to carry out the program of any such “troika” (EU, IMF, ECB) forgetful of the meaning of “democracy” – if it ever understood it – or a candidate who will, after a perfunctory six month delay, carry out the exact same program, in “former president Miterrand’s fashion”, following a “valiant” last stand.

No doubt, that last stand will turn out to be “valiant”, but again, a fat lot of good it’ll do you.

One can sense the weariness, the discouragement pervading your comments on this blog since the election campaign started.

Throughout history, particularly in the 19th century, that kind of hopelessness had led to several social change attempts from within the system. For instance, it gave birth to an array of communal groups, rendered vulnerable from the very start, to some extent, by an exaggeratedly idyllic view of human nature, but mostly due to the hostility of an outside world, a world which had stood unchanged. How many a grandiose project of a cooperative, of a social workshop, of abolishing money, of an alternative currency, did not succumb to the assaults of those from the outside who had retained their, let’s call it… “business sense”? Virtue, as Saint-Just realised far too late, can only be exercised within a protective institutional framework, otherwise, it is purely and simply trampled under foot.

What to do? Those unanswered questions require resolving, if the goal for a preferred tomorrow is to achieve a decent, livable world. A world where, in retrospect and in contrast, we will realise what a nightmare the previous world had been that we contended ourselves with.

Indeed, those 19th-century associationists, collectivists, socialists, communists, anarchists, even enlightened liberals such as Saint-Simon and Auguste Comte, posed those unanswered questions, but still, they remained unresolved. The 20th century, for its part, has had its share of false solutions ending in atrocities.

In France, the Revolution of 1848 gave birth to numerous projects founded on generosity but soon failing, due to the instigators’ lack of a proper analysis of principles. Proudhon laments the “premature birth” of the Revolution. But aren’t all revolutions always, and by definition, born prematurely, otherwise they wouldn’t even have been considered as necessary. The excuse has been abused throughout human history, of having been caught unprepared in the face of an “unpredictable” collapse, even if predicted with some accuracy by a few.

Last Sunday, I launched a five-part series called: “The Remaining Unresolved Questions”. I have only been back home last night, following a series of speeches in Belgium and Holland, with no time yet to read your contributions to the debate, but I am readying myself to do so.

Anyway, those “Remaining Unresolved Questions” are already well-known. What I am expecting of you, is for a few (the rest of the troops fill follow suit in no time) to initiate an undertaking of resolving those questions. A precise list will take shape along the way, but in the meantime a few questions can be clearly formulated: “How do we smash the wealth-concentrating machinery?”. “How do we terminate speculation?“. “How should newly created wealth be redistributed?”. “How do we re-invent an economic system neither based on private property, nor on “growth”, both recognised as life destroying on our planet?”. “How do we eliminate work, without reducing to misery those who lived from it?”. Etc. Etc.

Time has come to define in new terms this insane world that – because of weariness and because of discouragement – we have contented ourselves with until now.

So, have a nice day, get set, ready, go! Use your pens, emails, phone calls, your arms, your legs… whatever works!

An English translation by Bernard Bouvet of my post “Les spéculateurs sur la dette grecque, neutralisés”.

Last Friday’s ruling by the International Swaps and Derivatives Association (ISDA) that the much talked about Greek debt swap, or the so-called private sector initiative (PSI), does not represent a “credit event” and, therefore does not trigger Credit Default Swaps (CDS) payments, constitutes a remarkable victory against the markets, the first real victory in an asymmetric war started exactly five years ago at the height of the subprime mortgage crisis.

With this decision, sovereign debt speculation is being brought to heel: being effectively neutralised, since a partial default (private holders of Greek debt getting 46.5 cents on the euro), alongside a debt rescheduling and a readjustment of interest rates guided less by speculative motives and more by an objective risk evaluation (taking into consideration the European guaranty), won’t be viewed a “credit event”. If such an array of reasons for depreciation is not viewed for what it should be, then nothing will from then on, at the very least as far as CDS contracts on euro sovereign debts are concerned.

It was long overdue for debt buyers, more accurately, lenders to sovereign states, to acknowledge that the rate tagged onto a loan – the “coupon” – already includes a risk premium, that is calculated specifically to compensate the preferably rare occurrences at such times when the advanced funds won’t be reimbursed, or only partially, such as in Greece’s case.

The sovereign states, having until now unconditionally and scrupulously followed the diktats of the sovereign debt speculators, desperately needing a victory to re-stamp their authority, should be grateful to the ISDA. Its fifteen members committee’s decision was apparently unanimous: an impressive feat, admittedly. What could have been the motivating factor being the consensus? With no explanation – none will be provided, we are being assured – one can only speculate (pun unintended).

The most likely scenario: as representative of all players in the CDS market, the ISDA had to protect the conflicting interests of two very different types of speculators, those who contracted naked positions on the Greek debt (in other word, speculating on Greece’s default without really being exposed to the risk of a loss), and those issuing CDS (with no adequate capital reserves, as permitted under the legal framework – or rather in its very absence). An overall process of risk analysis probably swayed the needle in favour of the “insurers”, their downfall proving more costly and a source of an increase in systemic risk (risk of a collapse of an entire financial system) than the failure of the bettors (the ghost of AIG still haunts memories – that insurance company infamous collapse in the fall of 2008 brought about by the reckless issuance of CDS in the demise of Lehman Brothers and its collateral victims).

If my hypothesis is true, the neutralisation of sovereign debt speculation happened not so much thanks to the sovereign states themselves, but rather to the two opposite types of speculators in that market neutralising each other. With all due respect, if one was expecting the sovereign states to show, once again, some courage, one would probably have to wait indeed a very long time!

Guest post. Translated from the French by Bernard Bouvet.

This is Athens!

We are barely able to recover from Memorandum 2 (see the latest entry (Sightseeing Athens) on my blog “Greek Crisis”). The Shock Strategy, when undergone as a…patient, doesn’t give you any respite. Multi-risk, multi-faceted, a total weapon. In the meantime, through the mainstream media, I see that France, self-absorbed in electioneering, is turning its presidential campaign into a political beauty contest, far, far removed from the crucial issues.

At home, the bankocracy’s advance is measured at the speed of light: the situation is far worse than what we had imagined. We still have access to information, however difficult. On the other hand, the citizens haven’t yet really grasped the crux of the matter, being bludgeoned as they are under so-called austerity measures that cleverly hide ulterior motives. Alas, a lot worse is to come: society’s general frame of reference is to be brazenly transformed. The empty shells, at home, like the papademocracy, and elsewhere, will last the required period of time, and then, one fine day, we find ourselves under a political regime totally… alien!

The Greek State has been abolished, as a matter of fact. That will become increasingly evident next summer. What I, and some others, want to find out, is who is behind the company Hellenic- Securitisation S.A.: its founders, partners, “backers”, shareholders, public or private (individuals, companies, banks, etc.). Recently established in Luxembourg, this structure will “manage” the Greek debt. Through this channel, Greece will be stripped of its private and state assets. Greece becomes then an ex-State, assuming the legal status of a corporation, a country whose name itself becomes a brand, changeable at the will of “shareholders” if that helps to improve profitability. In a nutshell, this is the talk of the streets here.
In any case, there is a little bit of info regarding this structure here (); more is needed.

Is there anybody here, among friends of the “Blog de Paul Jorion”, anybody who cherishes the Truth, who has an idea about how to go uncovering the facts around this Hellenic Securitisation S.A.? Aside from any journalistic considerations, I sense that we are touching a structural and “structuring” aspect concerning our “Greek experiment”. A situation, to my knowledge, with absolutely no precedent in the installation of a new regime in Europe.

Thank you in advance for your help!

An English translation by Bernard Bouvet of my post Une menace sans précédent (ou presque).

You will recall what Dick Cheney, the former U.S. Vice President, said at the time, it was 2001, about Saddam Hussein? No, not that, I mean before there was any question of “weapons of mass destruction.” Cheney’s affirmation was that Saddam Hussein was in league with Al-Qaeda, implying that even if Saddam himself didn’t happen to be a terrorist, it was still very much all the same. Although various official reports over the years disproved any contact between Saddam Hussein and Al-Qaeda, a 2005 poll revealed that 63% of Americans were still convinced that such links existed.

Let’s fast forward about nine years, to last week, in Washington D.C., at the White House. In the course of meetings held there, according to The Wall Street Journal, dated yesterday Feb. 21st, an assessment was provided by Gen. Keith Alexander, the director of the National Security Agency (NSA) (*), the agency tasked primarily with keeping an ear on all which is being voiced around the world, on Internet, in phone conversations, or otherwise.

As reported by the Journal: “Possible scenarios discussed, the former official said, included one in which a foreign government developed the attack capability and outsourced it to a group like Anonymous, or if a U.S. adversary like Al-Qaeda hired hackers to mount a cyberattack.”

Support for the Stop Online Piracy Act (SOPA) is wavering as the result of the joint strike action by Wikipedia, Google, and the social networks. The multinational Anti-Counterfeiting Trade Agreement (ACTA), after several countries have been reluctant to sign it, looks like a sitting duck. That doesn’t seem to trouble Washington: the “self-evident” threat presented by all those Internet protests will be “managed” by means of a more… how should we put it…

================

(*) The National Security Agency (NSA) is a cryptologic intelligence agency of the United States Department of Defense responsible for the collection and analysis of foreign communications and foreign signals intelligence, as well as protecting U.S. government communications and information systems, which involves information security and cryptanalysis/cryptography…

By law, NSA’s intelligence gathering is limited to foreign communications, although domestic incidents such as the NSA warrantless surveillance controversy have occurred…” (Wikipedia)

An English translation by Bernard Bouvet of my post: M. Stiglitz n’est pas au courant.

What caused it? Is it the one year 7% decline in Greece’s GDP in 2011, 16% altogether since the crisis began in 2007? Or perhaps the defections among members of the Greek parliament during Sunday’s vote, followed by exclusions from their respective parties, and to top it all, opinion polls in favour of the Left and the Radical Left? The Greek government giving thus the impression that it doesn’t represent the will of its citizens “anymore”, and so, rendering Sunday’s vote on austerity plan meaningless?

In any case, eurozone leaders are now hesitant. The postponement of the Eurogroup meeting scheduled for today (Wednesday Feb 15) – replaced instead by a conference call – is an indication that those at the top are all of a sudden starting to feel weak at the knees: yesterday morning’s triumphant mood faded into a flimsy excuses session by evening.

Earlier on Monday, I was musing how long that formidable immunity to facts would last, as shown by the troika now governing Greece for the last several months and poised to follow suit in the rest of Europe. Just to be clear, I mean the ultra-liberal, closed club involving the European Commission, the European Central Bank, and the International Monetary Fund. Last evening reactions seem to suggest that the vaccine may be wearing off after all.

In a recent interview, Mr. Stiglitz, whose analyses are usually excellent, is raising the question of what is behind this immunity to facts. He wonders if banks in the eurozone failed to cover themselves against an eventual default of Greece? Or whether anyone has the capacity to assess the ensuing losses? Perhaps the reason, Mr. Stiglitz reflects, is the basic inability of the CDS issuing financial institutions to cover the claims in the event of a default?

It certainly is a combination of all of the above, in particular the fact that by and large, CDS have probably been issued by some of the least solid German banks and even Greek banks themselves. (Human stupidity knows no bounds! Seriously, who could have ever thought-out (dreamed?) that a bank in a given country constitutes an insurer of choice against a default payment of that very country?) The real culprit is not at all a true mystery, there it is: private retirement savings accounts, the ultra-liberalism’s last bastion.

Private retirement savings accounts were meant to save the world. Once and for all, private retirement savings accounts were supposed to triumph over several grotesque values we had inherited from the 18th century, such as – ew! yuck! – solidarity. Private retirement savings accounts would rid this world of the shame of unfunded pension plan (pay-as-you-go, PAYGO) which turns parents into “ogres devouring their own children and grandchildren” (dixit). Most of all, private retirement savings accounts would bring retirement plans into the glorious and sacred realm of profit. But to fulfil this destiny, the portfolios of insurers required constant and ineluctable growth. The stock market had to rise steadily forever. At one time, the thinking was, some still do, that high-frequency trading could give a helping hand – invisibly! – without having to prosecute and/or convict too many whistle-blowing programmers. And above all, government bonds, and sovereign debts, could never ever depreciate.

Now with Greece defaulting, or rather with the fact that it is finally recognized that Greece is defaulting, the house of cards is collapsing. The demise of private retirement savings accounts puts an end to the myth – guarantor of social peace – that “We are all shareholders and investors”. It puts an end to the myth “that everyone can get rich, it’s just a matter of effort!”. That myth, also, has been contradicted by facts, for at least the past twenty years in Western countries.

No, Mr Stiglitz there never was anything mysterious about why the troika is immune to facts!

An English translation which can be read here of my post “Refonder le capitalisme”: Le moment est venu by Frankly.

It Is Time to Restructure Capitalism

Is there anything more depressing than the spectacle of the short-term remedies that are being applied at present with a view to saving the capitalist system, in the absence of determination to do what would actually be necessary to achieve that objective?

Look at what is happening in Greece, where the Troika (the European Union, the European Central Bank and the International Monetary Fund) is endeavouring to impose on the Greek Government measures which everyone knows to be unworkable. And what will be achieved if agreement is reached? A reduction of that country’s sovereign debt to 120% of its GDP by… 2020!

Even if in the coming days a formula were to be arrived at for a partial default of Greek sovereign debt which might be tolerable for the Greek people, Portugal and Ireland would step into the breach and immediately lay claim to the same benefits for themselves, which it would be beyond the capacity of the Eurozone to provide, repeating ad nauseam as it does that the solution which it is aiming for in Greece will have to be an exception, come what may. And, as everyone knows, the Greek problem all by itself is already ‘systemic’, i.e. capable of bringing about the collapse of the Eurozone. (This was not the case when warning signs first appeared at the beginning of 2010… but it is now in consequence of the failure to take action in time!)

On August 2nd the United States raised its debt ceiling to $14.3 thousand billion. One need hardly make the point that dollar bills for this sum of money, if stacked up, would cover the distance from the Earth to the Moon by a factor of X, as it should be apparent that this hole will not be filled up all by itself no matter what improvement may occur in that country’s economy.

The squaring of the circle that economic recovery represents, combined as it is with austerity, is but one insoluble problem among a host of others at the heart of the capitalist system.

When, on September 25th 2008, in his Toulon address, Mr Sarkozy drew attention to the need to restructure the capitalist system, it is a pity that the means to undertake this indispensable task were not immediately made available. Precisely because it is a very ambitious project, it was perverse to leave it to individual initiative to carry it through. A council of distinguished individuals – preferably international – should have been convened without delay, and adequate means should have been put at their disposal to draw up the measures which are required.

More than three years have passed since the Toulon address and, apart from rather disorganized anti-capitalist protests in various parts of the world, individual initiatives aimed at restructuring capitalism have proved inadequate. Valuable time has thus been lost, but it is not too late, the problems with which we are faced, and which have become more serious everywhere, having become clearer in consequence of this.

Let us demand that the powers that be immediately engage in a debate on the restructuring of capitalism and that unchallengeable authorities on financial, economic and moral questions be brought together (rather than economic and financial ‘experts’ who are associated with an accumulation of embarrassing failures) and that they be given the task of drawing up a schedule for this (addressing structural and institutional questions, of course, as distinct from short-term tactics aimed at nothing more than gaining time in the face of a collapse which has become unavoidable). Let us entrust to these people the task of restructuring capitalism and, if they conclude that this is not feasible, let them provide us with a plan for creating a system to replace it.

I’ll be holding a seminar on the following topics :

“How does one become the anthropologist of the financial crisis? Fieldwork, participant observation, the closed world of bankers and what makes the anthropologist’s toolbox so special”

More information here.

On Friday, in a single forward-market trading session, gold lost 5.8% of its value, and silver lost 17.8%. Considering the present state of the financial markets and the overall condition of the economy, which for the past few weeks has been entering the second phase of the ‘W’ double dip which began in 2007, this might seem surprising, precious metals constituting the very prototype of the safe-haven investment.

In reality the fact that precious metals – particularly gold – have been rising steadily since February should be interpreted in hindsight as a sign that the financial markets were in relatively good shape in the first three quarters of the year. For the price of gold and silver is falling at the moment not because they have ceased to be defensive investments but because some investors who had bought into them are selling them at the moment, not for the purpose of profit-taking but because they are unable to do otherwise, as they are having to pay off debts which they are incurring elsewhere or because the clearing houses in markets in which they have investments are issuing them with margin calls, i.e. requiring them to increase their funding reserves in consequence of their losses.

In other words, the sell-off of gold and silver that we witnessed last week and particularly on Friday amounts to nothing other than emergency selling by market players in difficulty. One person questioned about this by the Wall Street Journal yesterday remarked that “it seems as if the European banks are selling gold, possibly with a view to increasing their available liquidity and shoring up their balance sheets“.

When we enter into a period of clearance sales in the financial markets, like the sell-off of precious metals that took place all day long on Friday, we may say that the collapse is spiraling out of control. Managing market risk depends on the prices of certain products rising while the prices of others fall. Now, when everyone is getting rid of everything because there really is no choice, as is the case at the moment, the prices of all products collapse at the same time. Covering financial positions – protecting them against loss by taking positions on products whose prices are rising – is no longer possible, and so risk management descends into chaos. This is what happened on Friday, when losses which they incurred forced certain market players to divest themselves of a certain type of asset held by them. Such a large quantity of assets being offered for sale all at once caused the price to fall, leading other investors to incur losses, which forced them to sell too, and so on and so forth, creating a diabolical spiral.

The misadventures of Mr Adoboli at Union de Banques Suisses, which came to light last week, were disturbingly reminiscent of those of Mr Kerviel at the beginning of 2008. The Friday clearance sell-offs themselves thrust us back into the frenetic atmosphere of 2008. Unlike his counterparts at Société Générale who have chosen to stay in post, Mr Oswald Grübel, CEO of UBS, preferred to resign on Saturday. How should one interpret this gesture? A revival of a sense of honour in the management of banks? Or, rather worryingly, simply throwing in the towel?

[English translation of my September 24 post: Avis de gros temps sur la gestion du risque de marché on my French blog by Frankly. Thanks, Pal!]

A passionate discussion has started on my French blog about the article The network of global corporate control, by S. Vitali, J. B. Glattfelder, S. Battiston.

I’m hoping that a parallel discussion in English starts here.

Here an excerpt of the paper to whet your appetite:

… nearly 4/10 of the control over the economic value of transnational corporations in the world is held, via a complicated web of ownership relations, by a group of 147 transnational corporations in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries.

A translation by Bénédicte of my post of September 3^rd: TAVAKOLI vs. JORION. LA CRISE DES SUBPRIMES : PYRAMIDE ORCHESTRÉE OU SPONTANÉE ?

You will find in my “La crise du capitalisme américain” (The Crisis of American Capitalism) (La Découverte 2007; Le Croquant 2009), written between November 2004 and October 2005, a chapter describing the dynamics of the crisis which was then underway. This chapter is entitled: “The price of shares and houses: financial bubbles” (pages 195 to 220) and it contains a section entitled: “The financial bubble as a ‘naturally occurring Ponzi process’”. The phrase was not mine: it was borrowed by me, as I explain it there, from Robert J. Shiller, who introduced it in his book Irrational Exuberance (New York 2000).

The subprime crisis I was anticipating and of which I was describing the future course was essentially to me a spontaneous process. I will explain the word “essentially” later on.

In “L’implosion” (The implosion) (Fayard, 2008), which came out in May 2008 – I mention this to emphasize that I had finished writing this book more than six months prior to the fall of Lehman Brothers – I use the events that took place in 2007 and early 2008 to illustrate the dynamics of the bubble and its ultimate bursting which I had forecast in The Crisis of American Capitalism. To a large extent, I was then simply filling in the blanks of the description I had made three years earlier (See also here my April 18^th, 2008 blog: A population dynamics approach to the subprime crisis).

Why bother reminding this? Because of an e-mail I received today (September the 3^rd) from my friend Janet Tavakoli, containing a statement she made on December 8, 2010 before the Federal Housing Finance Agency, the regulator of the Government-sponsored Entities Fannie Mae and Freddie Mac, as well as a powerpoint presentation summarizing her testimony.

In these presentations, Janet Tavakoli describes the subprime crisis as a “pyramid” or a “Ponzi scheme”, not as a “spontaneous” one but an orchestrated one. In other words, while I describe the subprime crisis as essentially displaying a dynamics of let’s say a “physical type”, she describes it as primarily resulting from intentional fraud.

It would never cross my mind to claim that fraud played no role in the subprime crisis. There was fraud but it did not play, in my opinion, a more important role in the subprime crisis than anywhere else in finance – and in the business world generally speaking where it is endemic. Here is what I wrote in that respect in an article which was first published on the present blog, and then in the N° 161 issue of the Le Débat review that came out in September 2010:

Decision-makers define the criterion for their club membership as expertise. My own [financial] experience of eighteen years convinced me that this criterion is actually of a different nature: a personal leniency towards fraud.

… in what terms do decision-makers refer to this leniency towards fraud? As “team spirit.” “The person in question fails to display team spirit” is the coded language used in the world of financial institutions for finger pointing those who show integrity and disapprove of fraud.

Deliberate efforts to feed the spontaneous dynamics of the financial bubble came to be added to it, orchestrated by the Mortgage Bankers Association, the trade association of banks granting mortgages in the United States. I’m discussing this in the pages devoted to “predatory lending” in The Crisis of American Capitalism (pages 148 to 151) as well as in the chapter entitled “The anti- “predatory lending” Act of North Carolina (1999)” in The implosion (pages 264 to 268). I describe the deliberate efforts made to feed the bubble. We’re talking here though of greed, not of fraud.

Between the interpretation of the dynamics of the crisis offered by Janet Tavakoli’s and mine, a choice needs to be made. I fear that if we focus only on fraud, we will end up one day throwing out the baby with the bathtub water. I fear that if we use the idiom of a police force and judges failing to do their job, we will one day claim that problems have been solved because half a dozen bankers are now behind bars. We will then have forgotten about financial bubbles as “spontaneous Ponzi processes” whose dynamics is beyond the capacity of individuals – be they bank executives – to prevent and control them. We might neglect then as well the current inability of economists to detect the occurrence of such bubbles, and their lack of knowledge about how to control them when they occur. We would forget about the need for bodies whose aim is to detect the appearance of bubbles and, should they occur, to nip them in the bud. We would forget about the need to create a genuine science of economics understanding the dynamics of bubbles instead of the propaganda doctrine which is currently being sold under that label.

Finally, and to further support the validity of my own approach, I will simply state the following: I would have been unable to forecast the subprime crisis back in 2005 by detailing its dynamics and then “fill in the blanks” of that description with the evidences that the crisis provided in 2007, if the dynamics of the crisis had not been essentially what Shiller called as “a spontaneous Ponzi process”. Massive fraud depends on too many individual decisions, on too many imponderables, the overall effect of which is unpredictable to allow a precise forecast of a crisis caused by fraud.

Guest post

A few days ago, I was contacted by a friend of mine, in New Zealand, who was concerned about the bad news affecting the economy and, particularly, Spain, where I currently work. In answering the two questions he asked me, I have tried to describe what seems to be the main problem of this country (and many others, but Spain is indeed a glaring example), and in doing so, hope to provide an alternative insight to counter the facile accounts of idle Mediterranean workers and “Club Med resorts lifestyle”, frequently advanced as the logic for Spain’s demise. As a regular reader of Paul Jorion’s blog, I asked him if he would do me the favour of reading my text. Not only did he kindly agree to do so; he also proposed that I publish it.

First Question : “It would be very interesting to hear your views on the economic situation in Spain.”

Answer : Well, in reality, it is a question of sorting through the views presented in the media. To go straight to the most covered subject, employment, one has to consider that there’ve always been a lot of “under the table” jobs in Southern European states, but this is not what can drive the public deficit to a critical point. Of course, tax inflows are reduced that way, but this didn’t prevent Spain from having a positive balance before the crisis, i.e. no deficit! On the contrary, this black market means the authorities still have some room to manoeuvre. In spite of this, many analysts say that this is too bad, that 20 % unemployment is unbearable. Well, shall I remind them that the unemployment in the USA is officially over 9 %, but if you add the part-time jobs of only a few hours per month, then you reach… 20 %! The only difference is that in Spain these part-time jobs are often undeclared. Gosh, this is such a “tradition” in the Mediterranean, that if what the mass media say were true, then Spain and consorts should have already collapsed at least ten times in the last 50 years!

Read the rest of this entry »

With Annette Young, about the current developments of the crisis.

We will discuss the stock markets’ tumble.

Here’s only a short extract of the interview for German television channel ZDF

The full video will be broadcast next week.