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.)

Frantically offloading their assets in order to reinforce their core capital ratios, they are not only providing the opportunity for their buyers (non-European banks, hedge funds and investment funds) to snap up some bargains, but are also contributing to a fall in prices of these very assets (since the supply is truly abundant), and consequently to lower levels of liquidity in the market (since buyers demand more). This increases in turn the need to sell yet more new assets, and so on and so forth.

Analysts from the Bank of England have just calculated that the massive injections from the Central European bank will not compensate for the shrinkage of the market occasioned by this fall in prices and that the banks will not be able to refinance themselves. The only remaining solution is to renew the operation or to take action with respect to the falling prices of the collateral on which the Repo market depends, by regulating in order to limit it. Since this market, the meeting place of both the regulated banking sector and the shadow-banking system, has become one of the greatest worries of the regulator.

It is for this reason that the Financial Stability Board (FSB) has been tasked with drawing up before the end of the year some recommendations to the governments of the G20, with a view to establishing some new operating rules for shadow banking. To begin with, an attempt to describe the enormous heterogeneous sector of activity has been realized, which, according to Michel Barnier is worth half of the total global value of the financial sector. In the United States alone, it is said to represent 2 700 billion dollars, which is half its highest level of 2007.

The regulators have also identified the different mechanisms through which the repo markets could destabilize the financial system as a whole.  Something which ultimately amounts to an all-embracing problem: that of an actual increase in value of the assets… which reveals the necessity of regulating the repo markets, and therefore the shadow banking system which plays a part in it.

The mega-banks would not be totally opposed, taking into account (to make up for it) the relaxation of the Dodd-Frank Wall street reform act, whose implementation decrees are delayed due to it being still under consideration. A delegation of Managing Directors from these mammoth companies has just brought before the Fed their register of grievances to this end. But meanwhile, after having undergone a significant downsize, the shadow banking system has gradually started to prosper again as the threat of tentative regulatory measures takes shape. The Mega-banks had set this date a long time ago and explained that a choice would have to be made! Obviously, the moment has come!

The regulators are caught up in other contradictory imperatives, prompted on one side to acknowledge the increase in the volume of the security deposits in the clearing houses which they created and which are used at their request for an increasing number of transactions but which possess the flaw of concentrating in their heart all the risks – and on the other to combat the pro-cyclical margin calls which contribute to a devaluation of assets, thus undermining the pillars on which the repo markets repose. Lord Turner, a member of the FSB and president of the Financial Services Authority (FSA), the British regulatory authority, is in charge of the dossier and seeks to impose limits to margin calls, this order to a market participant to provide supplementary funds as a guarantee. In the end, that would amount to an about turn by undertaking in a regulation of the products after having gambled everything on a regulation of the structures.

None of this will change the fact that this regulation as it is conceived will not provide the solutions. The latest episode to prove this is that the operators of HFT (High frequency trading) are in the process of abandoning the world’s major stock markets in order to join exchange platforms that are less heavily regulated, worried by the threat of tentative, legally binding regulations currently under discussion. Such is the observation made by Duncan Niederaurer, the Managing Director of NYSE Euronext, the operator of the stock exchanges in New York, Paris, Amsterdam, Brussels and Lisbon. The tendency is in fact towards a very heavy drop in the volume of transactions, as well as the resulting reduction in profits.

You think you are mastering a situation by grabbing one end, and it escapes by the other.

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.

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…

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(*) 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)