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 3rd: 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 18th, 2008 blog: A population dynamics approach to the subprime crisis).
Why bother reminding this? Because of an e-mail I received today (September the 3rd) 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!
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.
S&P’s downgrading of US’ credit rating
The American economy
The euro zone crisis
The riots in Britain
How to get back on complexity ?
Frankly has been so kind as to translate my most recent post. The original French version is here.
“How should one define a catastrophic scenario in a situation such as this?”
There is no panic yet in the American financial markets, but disquiet is spreading. The Dow Jones industrial index fell by 3.3% over the last four trading sessions, half of the decline occurring yesterday.
During the fateful weekend of September 13th and 14th of 2008 the upper echelons of American finance conducted a review of all that could turn sour if they let Lehman Brothers go under.Everything was thought of, except the money market, the short-term capital market, which today has a trading volume of $338 billion. What a pity, as that is what collapsed, causing a blood-letting which it took nearly $1 trillion (a thousand billion dollars) to bring under control.
This is what explains why all eyes are now fixed at this moment on the money market and why everyone who expects to be needing fresh capital in the next three months is scraping the bottom of the barrel for a little ready cash. The first casualty, of course, will be recruitment of staff, as if recent news about the employment market allowed much scope for this! The second casualty: business investment.
Prices of bonds reaching maturity in August have begun to go down over the past few days, but not as much as might have been expected, which is taken by some people to be a further sign that the debate on raising the US debt ceiling is merely a storm in a teacup. But this relatively mild effect at this point is only due to the fact that the dollar is a reserve currency, there being not too many known substitutes for American debt in the financial markets – and in sufficient quantity – to serve as collateral, i.e. security for deposit as a guarantee. A downgrading of the credit rating for US debt will cause a rise in interest rates and a simultaneous depreciation in the value of these debt instruments, which will force those holding them as security to make a ‘margin call’, which means demanding additional guarantees to make up for loss of value. And this will also apply to the infamous Mortgage-Backed Securities, securities backed by mortgages, which in the United States are nowadays almost all issued by Fannie Mae and Freddie Mac, which are Government-Sponsored Entities, which would have to be wound up, moreover, if found to be in default for more than sixty days, which, according to some commentators, is an outcome that the Republicans are secretly hoping for.
A downgrading of the US credit rating will put the base rate up by only 60 basis points, i.e. 0.6%, which represents an increase of $100 billion in the annual cost of servicing the debt, it was stated last night, but this figure is based upon the supposition that the rating agencies will content themselves with lowering the US credit rating from AAA to AA, even though, in view of the slow rate of progress of efforts aimed at reaching a compromise on raising the ceiling of American public debt – the Republicans opposing all increases in taxation and the Democrats giving no ground at all on proposals aimed at dismantling social-security provision – this should now be regarded as an exaggeratedly optimistic hypothesis. In so far as there are internal regulations here and there limiting the holding of debt instruments to those carrying a AAA rating, which would oblige holders of American bonds to find substitutes for them, this is a gamble, to the extent to which the rating of most of the private American debt instruments is linked to federal bonds, the guarantee offered by the state protecting them up to a point. There were, accordingly, reports in the press yesterday that certain foreign bonds, i.e. several Israeli ones and an Egyptian one, would also be subjected to an immediate downgrading because they are 100% guaranteed by the United States.
And these are only the ramifications which have been thought of at this point. In this connection it should be borne in mind how it dawned on people in the autumn of 2008 that it had come to be the case that in the world of finance everything is intertwined with everything else and vice versa. Clearly, the game has only just begun. I shall leave the last word to a businessman who was interviewed in the Wall Street Journal for its Wednesday edition: “We are preparing for a catastrophic scenario. But how should one define a catastrophic scenario in a situation such as this?”
Frankly Francophone has just translated one of my recent French posts into English. Thanks Franky! The original post is here.
They wanted to extend market logic to absolutely everything. In attempting to do so they disregarded the domain of ethics which had governed human affairs up to that point. The trader – the quintessential victim of gold fever according to Aristotle – has ceased to be considered to be a victim if he succumbs to the disease, having been elevated to the status of prototype of the rational human being! The employee in turn has ceased to be regarded as the victim who makes do with what is left after the investor and the board of directors have taken their share of the booty and is now defined as a ‘manager of human capital’, the ‘human capital’ being none other than his good self.
The state is henceforth viewed as a more or less thriving private enterprise, the performance of which is evaluated by other private entities known as rating agencies . . . which are legitimately concerned with market share, at whatever the cost may be. Take note, however! This is on condition that the sacred law of perfect competition is respected!
Meanwhile, gamblers are raising the stakes, betting on which state will go under first. “If it’s Spain, I’ve won; if it’s Italy, you’ve won!” says one. “But why stop there?” says another, raising the stakes: “If it’s Moody’s that sinks the Eurozone, I win; if it’s Standard & Poor’s, you win!”
Come on. Don’t just stand there watching from the sidelines. Why not join in? Don’t be shy! The stakes are HIGH!
The fall of the Roman Empire, live on the Internet. And you witnessed it at first hand!
My most recent column in the French daily paper Le Monde : Le risque systémique court toujours. As usual the translation is due to Bénédicte.
Lehman Brothers’ bankruptcy, on September 15, 2008, and its aftermath – more than one trillion dollars being injected into the financial system – have caught people’s attention about financial firms “too big to fail”, i.e. that their bankruptcy is bound to automatically cause the downfall of the entire financial system.
On June 15, the Bank for International Settlements in Basel, that is to say “the central bank of central banks”, announced the measures it is recommending for these banks, labelled in its own jargon: “Global Systemically Important Banks” or G-SIB.
The philosophy underlying the Basel agreements consists in requiring that banks hold sufficient reserves to cope with the losses they may endure. For obvious reasons, the figures required from G-SIB are on the rise: in addition to reserves ranging from 7 to 9.5% of the capital at risk, the G-SIB will provide additional reserves ranging from 1 to 2.5% of capital properly so called (Tier 1), depending on some aggravating factors: size, interconnection with other G-SIBs, difficulty for other institutions in taking over from them should they default, global nature and complexity. Should the future evolution of a financial institution result in a magnification of these aggravating factors, an additional reserve of 1% would be demanded from them.
What should we make of these measures?
There are three conceivable approaches when dealing with G-SIBs:
1) Dismantling them into small units the size of which is such that their default does not trigger any domino effect.
2) Discouraging or prohibiting those activities generating systemic risk.
3) Finally, trying to solve the qualitative through the quantitative: raising their reserves to a higher level than the pre-crisis one, hoping that the calculation was done correctly this time, with no guarantee that this is indeed the case.
In the Autumn of 2008, only the first two options were regarded as plausible, the third – which has just been chosen by the BIS – was dismissed due to its touching naivety. Turning their back away from learnt lessons, they come back to the out-dated risk management methods where nothing is done to control systemic risk and only potential losses are assessed.
Basel III makes no distinction between inescapable risk due to contingencies and risk voluntarily incurred. First among these, of course, wagers on price fluctuations – which were forbidden in France by article 421 of the French Penal Code until 1885, when it was repealed under pressure from the business world. Eliminating these wagers would greatly reduce overall risk and it would be possible to set the level of enforceable reserves much lower than it is now, limited to covering two risks: loan loss and any loss incurred due to the insurance-like activities of banks.
Because the legislator fails to force G-SIBs to be dismantled or reduce the systemic risk generated by their activities, Basel III has no choice but imposing – from 2016, and gradually until 2019 – a raise in their reserves.
The next crisis – should it be patient enough to wait until then – will necessarily be worse than the last one and such reserves will prove “to everyone’s dismay” to be insufficient.
Against those who are determined to bring doom upon themselves, even the gods remain helpless.
Now online.
I defend my proposal of a prohibition of wagers on the evolution of prices (which was standard in the 19th century) within the framework of a Constitution for the Economy.
I’ll be on the Dutch television on Sunday night. I’m being interviewed by Aart Zeeman in a broadcast that kro produces.
Guest post. Taking advantage of my interview with Caroline de Gruyter in NRC Handelsblad, Lambert de Haas has put this all together. He’s expecting your remarks to make further improvements.
For those of you who read Dutch: an interview I had with Caroline de Gruyter, of the renowned financial daily NRC Handelsblad.
“Without the networks, Internet is nothing … Internet is not just a question of liberties, it is a question of money.”
When Stéphane Richard, CEO of Orange, one of the main sponsors of the e-G8, held in Paris on 24 and 25 May, uttered these unambiguous words, everybody in France seemed to be relieved: the debate about civil liberties on the Internet – which Bernard Kouchner wanted to make the central topic of this e-G8 – was put off until later, while the inexorable course of its commodification has been going on unhindered.
Lawrence Lessig, a Law professor at Harvard, was one of the few members of civil society who were invited to this event, quipped about the e-G8’s underlying philosophy: “I have only vague memories about philosophy, he said, but I cannot imagine a French philosopher saying: “Let’s ask the business world to define the state policy”, and he added sadly: “We recently gave it a try in the United States in matters of finance, and we cannot say it’s been an unqualified success.”
A wall of silence fell on the Internet at this county fair that was e-G8. Its first component is that of commodification. The second one, according to the final report of the e-G8, which was being circulated – as usual – before the festivities began, is the maintenance of law and order, which is already unscrambled or implicitly readable in some national/local laws, and particularly in France, in LOPPSI and HADOPI 2 Acts/Laws.
Of course, none of these pretexts is lacking of ethical rationale and they justify with equanimity global monitoring: the fight against terrorism and child protection, as if they were in themselves the justification for the establishment of a widespread system of spying on citizens by their own governments.
John Perry Barlow, one of the founders in 1990 of the EFF, the Electronic Frontier Foundation, the American union of Internet users, was one of a few personalities in the e-G8 who defended the values that don’t immediately translate into a price. He mentioned another justification for the proposed repressive apparatus: the intellectual property, which he rightly characterized as a concept distinct from “copyright”: like a patent issued by a company upon the ideas of someone who finally will only reap a few crumbs out of the harvested amount.
There is something common between these various projects of constraining the internet with legal shackles aiming at maintaining the commercial order of substantial profit margins and the more prosaic police order: the fear of what the Internet symbolizes by now. Its abilities on the one hand for establishing gratuity and the gift as the basis of social relationship by default, and on the other hand, for sweeping away in a few weeks, political regimes where, as e-G8 underlined, the state has been legally or illegally ruled by the business world.
The Internet community is fortunately not defenseless facing such diktats, at least those who are not impressed by such a program. John Gilmore, another founder of the EEF, has the last word as he one time had the opportunity to state: “The Net interprets censorship as damage and routes around it.”
(translation by Bénédicte Kibler)
Here is my monthly column for May for the Economy supplement of the daily Le Monde. It was translated, courtesy of Bénédicte.
For every attempt at a financial overhaul, a similar method has been used: consultation of the financial community by the authorities, followed by negotiations towards a compromise between the demands of both parties.
The essential condition for such a method to succeed is that the financial industry would relate with the common good and recognize and promote the need to ensure a framework that maintains the sustainability of financial institutions without affecting the overall health of the economy.
Is there any evidence supporting the hypothesis that every financial institution will stand up for the common good at the expense of its own particular interest?
Alas, no: quite the contrary. What’s happened throughout the crisis of 2007 and 2008 has proven it instead as an unfounded belief.
The U.S. Senate report, released April 13, confirms what the auditions of executives at Goldman Sachs in April 2010 had already highlighted. Namely that the firm – and several others, including, foremost, Deutsche Bank – has not only betrayed the trust of some of its best clients by selling them financial products (collateralized debt obligations – CDOs) that were structured in such way as to be of the worst possible quality, but that it also developed new derivative products (“synthetic” CDOs) to wager on the downfall of the entire U.S. mortgage industry. It has doomed those who were naive enough to position themselves on the other side of the bet, but also it has hastened the fall of the global financial system as a whole!
We read in the Senate report that the head of the mortgage division at Goldman Sachs promised “ginormous” bonuses to anyone who would manage to sell these products. In the meantime, one of the bank’s executives in Australia said in an email, referring to a sucker who was ready to buy these toxic products: ” I think I found white elephant, flying pig, and unicorn all at once.”
The financial establishments in question are pursuing their business unhindered. None of their officers has been charged. Better yet, they can be found sitting at the negotiating table, objecting to propositions uttered by regulators representing the community as a whole.
The method needs to be changed. Regulators need to write rules that allow to dramatically lower systemic risk.
While hedging positions neutralize an existing risk in an insurance-perspective, speculative positions, because they are wagers, create a risk that didn’t exist beforehand.
The speculator puts forward his contribution to liquidity in order to justify his presence on the future markets. This argument should be ignored: a liquidity supply is pointless when offered at speculative levels of pricing and, and even more so, it doesn’t compensate for the increase in systemic risk that it causes.
Once the appropriate measures have been defined, they should be implemented without any further negotiations with the financial industry: the inability of its leading representatives to relate with the common good has been amply proved during the most recent three years.
In my most recent monthly column in Le Monde - Économie – published on May 9th, I point out the fact that underlying the negotiations held since 2008 in view of a financial overhaul, there is an implicit premise that the representatives of the financial community have the ability of relating with the common good. The period 2007 to 2009 provides us however with sufficient evidence to falsify such an optimistic hypothesis. I suggested in conclusion that appropriate measures be implemented now with no further consultation with the financial community.
In his recent post entitled “C’est raté!” François Leclerc reports on the disastrous meeting of European finance ministers that was held on May 8th in Luxemburg. Since early last year, this was the umpteenth meeting aiming at solving the crisis in the euro zone. It is not without reason that François entitled his post: “Fiasco!” And indeed he could have entitled his whole series of articles about the euro crisis: ”Fiasco!” from the first one to number 14th. As with the case of the financial overhaul, the time has come to draw the conclusion that the negotiating partners have no ability for solving the problems of the hour: opportunities for finding a solution did exist in sufficient number and they were all allowed to go. Nothing has been achieved but delaying until 2013 the time for a solution – still very shaky in its terms –because of the various balloting concerns of each of the governments involved.
In February of last year, one of my posts here was entitled ”The House is on Fire!” More than one year has passed since, the fire is still smoldering and the final conflagration is imminent. The shock resulting from the final conflagration of the euro zone would be equivalent to the one that resulted from the bankruptcy of Lehman Brothers. It is now known that if the global financial system miraculously survived it has been at the cost of all concerned nations’ economic health.
Because negotiators who secretly met in Luxemburg on May 8th once again did not achieve anything despite the looming conflagration, the inescapable conclusion is that they will never get anywhere: their credibility has been lost as the months went by, from one unsuccessful meeting to another fruitless meeting. Therefore, as in the case of a financial overhaul, what is needed now is to change the entire formula. The time has come to think out of the box, to summon up the resources of lateral thinking without any further delay. The old ways of thinking and doing did not lead us anywhere but inexorably into the abyss. The work method needs to be changed, right now!
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One-day Conference in Paris on “Anthropology and the Crisis”
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