VUB, Stewardship of Finance, 1st lecture, The background: The stewardship of finance and the subprime crisis, September 30, 2013

I’m reminding you that access is free : QB lecture room, every Monday from 4 to 6 P.M., Pleinlaan, 1050 Brussels.

Full information here.


This is the translation by John Holland of my post entitled Complexité et effet Skynet, originally published on June 16th 2012.

The world in which we live today increasingly resembles a science fiction film from the 1950s. Some of those films were excellent because they raised fundamental questions about how machines seize power. Put more simply, they explored how the invasion of the machines–an invasion we have actively fostered for several centuries–leads us to lose control of the world. The film 2001, A Space Odyssey (1968) culminates in a battle: the machine that is really in charge of the mission―and knows how to carry it out―is pitted against the human crew member whom the machine has been programmed to sacrifice. Incapable even of imagining that he is not in command, the human is led by his arrogance to fight back and eventually to escape, although the nature of his salvation turns out to be quite problematic.

Today’s financial markets are the prey of robots that fight their duels in computerized space. This is the result of high-frequency trading algorithms, or algos. Of course there are programmers behind these algos, who write the software and can evaluate its effects at day’s end, fine-tuning when necessary and adding improvements and innovations. Nevertheless, and this is just like neural networks and genetic algorithms (whose inner workings are impenetrable to human perception), certain machine-learning techniques produce highly autonomous behavior in algos as long as they remain in operation. The upshot of this is that the “Skynet effect,” as we have come to call it, is now in play. This is a reference to the omnipotent computer network featured in the Terminator series. In those films, human beings no longer have a role except in a broader context where major decisions are all really made by a confederation of computers.

We must ask ourselves today with the utmost seriousness whether we still have control of computers and robots (other than having the power to flip the “Off” switch, of course). If not, what do we need to do to get it back?

Since this post was written, its object was illustrated in the graphic novel La survie de l’espèce (Futuropolis 2012) by Gregory Maklès and myself.

VUB, “Stewardship of Finance” Chair, inaugural lecture : Why Stewardship of Finance?, October 4 2012

The inaugural lecture of the chair “Stewardship of Finance”, delivered by me at the Vrije Universiteit Brussel, on the 4th of October 2012.

Why Stewardship of Finance?

When in the Autumn of 2011 I was first approached by Michel Flamée on behalf of the Vrije Universiteit Brussel about the chair I’m privileged to speak from today, the question of how it would ultimately be called was still undecided. The Flemish phrase used in the early discussions was “ethisch financieren”: financing in an ethical manner.

“Ethical finance”, “responsible finance”, “sustainable finance”, so many different phrases have been used to name chairs with similar intent as this one. The difficulty I see however with such ways of speaking is that they have been used in the past sometimes as mere euphemisms when referring to investors in search of a good conscience in the choice of an investment out of a mere concern for political correctness.

Continue reading VUB, “Stewardship of Finance” Chair, inaugural lecture : Why Stewardship of Finance?, October 4 2012

VUB, “Stewardship of Finance” Chair, inaugural lecture, 4th October 2012

Some pictures of the audience, of some well-known fixtures of the blog, as well as the introductory speeches of the chair.


1.    Historians of finance

Martin Meyer:

The Bankers, New York: Weybright & Talley, 1974
Markets, New York: Norton, 1988


Peter L. Bernstein:

Capital Ideas, New York: Free Press, 1992
Against the Gods. The Remarkable Story of Risk, Hoboken: John Wiley  & Sons, 1996


Steve Fraser:

Every Man a Speculator. A History of Wall Street in American Life, New York: Harper Collins, 2005



Translated from the French by Tim Gupwell.

With Great Britain suddenly threatening to invade the Ecuadorean embassy in London, methinks we will be hearing more about this one. Methinks that this might just be the famous single spark that can start a prairie fire. Methinks that we have the potential here of an Ems dispatch, of a certain assassination at Sarajevo, of a certain incident in Gulf of Tonkin.

An intuition, nothing more than a simple intuition.


Translated from the French by Tim Gupwell

Over recent years you may have seen me carrying out extremely complex complications such as this: “it needed four years – between 1929 and 1933 – before any genuine measures were taken at the time of the Great Depression!” And it was this kind of calculation which led to my disenchanted musings– since nothing was being done – when I wondered on the 28th June whether I should put an end to the blog.

And then, and in fact it was on this very same day, the second episode of the LIBOR affair broke, an affair which has since grown to such an extent that it is difficult to say where it will end, the only sure thing being that Barclays, which is only one of the 16 banks involved and certainly one of the least guilty parties, finds itself in the firing line today, and that up to now we have only had caught a glimpse of the highly probable involvement of the regulators and governing class in the affair.

The first episode, namely the events themselves, took place in 2008; the second, which is the realization, is taking place now, in other words four years later. Exactly the time needed, as I mentioned, during the Great Depression.

What can explain this sort of delayed reaction? Doubtless the time needed for an administrative enquiry to pronounce justice, but there is something else. And this other thing is the object of my article in Le Monde-Économie which will appear shortly: it is a climate operating like a reverberation chamber, ensuring that what had been merely an anomaly in 2008 (see my article in French un taux LIBOR à 3 mois trop bas de 17 points de base*) becomes in the eyes of public opinion in 2012, a scandal.

How is such a climate created? By the coming together of a number of different developments – for which four years would be required before a critical mass was finally attained – constituted (more precisely) in this particular case, in Great Britain, by the Rupert  Murdoch affair, which revealed an incestuous collusion between business leaders and governments, scorning all principles, and revealing (to reemploy the terms used in my forthcoming article) “an arrogant managing class, which does not trouble itself with rules, and organizes its affairs as it sees fit, whilst maintaining a bare minimum of appearances.”

This is how – in the case of one particular country – a climate is created which means that after four years, what had initially appeared to be a fairly banal collection of simple facts saw itself transformed into an absolute disgrace.

* The 3 month LIBOR rate 17 basis points too low


Translated from the French by Tim Gupwell

Paul Tucker, Deputy Governor of the Bank of England, made a statement this afternoon before a British Treasury Select Committee. The reason for his presence today was that on the 4th July, before this same committee, Bob Diamond (who was the Chief Executive of Barclays until a few days ago) had hinted that he had been under pressure from Tucker for the bank he managed to submit lower figures for its inter-bank borrowings than the figures it was actually submitting. The figures in question were used at the time by the British Bankers’ Association to calculate the interest rates known as LIBOR (London interbank offered rate): the interbank rates (in dollars) prevailing in London. During the course of a conversation between Tucker and Diamond, the first is claimed to have said to the other that “you wouldn’t suggest anybody doing anything wrong” if Barclays submitted lower figures than it had been doing. Tucker is said to have declared that he was being leaned on himself in this respect by senior members of the Government.

If Bob Diamond’s interpretation of his conversations with Tucker was correct, then a key figure at the head of the Bank of England was inciting one of the Executive Managers of the second biggest commercial bank in the country to manipulate the LIBOR, a rate which constitutes a reference point for the entire international financial system.

My feeling having watched this hearing from start to finish is that Tucker, once widely touted as a replacement for Mervyn King at the head of the Bank of England, has blown his chances. Mind you, I am still the same person who was convinced that Jérôme Kerviel’s trial (the first episode at least, not the recent appeal) would definitely not lead to a conviction!

Tucker’s explanation of the events was that there has been a misunderstanding about the meaning of the conversations he had had with Diamond. At that time Barclays had refused government aid, in the form of a massive capital injection, as it feared that accepting these sums would almost inevitably have lead to its nationalization. Barclays is said to have got round this a little later thanks to a capital investment from the sovereign funds of Qatar. What Tucker was trying to do – according to him yesterday – was to inquire after the health of Barclays: did the rates submitted, which were higher than its peers, signify that the bank was in difficulty?

Paul Tucker is definitely not a great actor: he mechanically poured himself water and started to drink as soon as he was in any difficulty. At times, when posed a question by his interrogators, he appeared utterly panic-stricken, manifestly worried about where it might lead to. Nor was he very assured on the question of what brought him there: when the chairman of the committee highlighted the fact that the committee was called at his request he replied half-heartedly that “You’ve asked me to come voluntarily”, which led the chairman to declare ironically, “largely at your request”.

What conclusions can be drawn? In a formal sense, that today, in the West, we are still living in a democracy. During Goldmans Sach’s hearing in April 2010 (l’audition des dirigeants de Goldman Sachs, en avril 2010), I wrote here:

At this moment in time, I have been at this hearing for two hours. What amazes me is the robustness of this democratic regime, in spite of all the forces ranged against its correct functioning, in spite of the colossal sums which are paid out to lead it astray. It is virtually a miracle to me that people like Senator Carl Levin manage to conserve – despite the great money machine crushing all before it – the integrity that enables them to oppose this steam roller, as he is doing now before my very eyes.

I feel the same way this evening: we are still living in a democracy, at least in what concerns the quality of information I am able to access. To my great satisfaction, it is this information in fact which enables me to read with great clarity between the lines of what is said.

All that remains is for me to be able to explain with just as much satisfaction why all this remains without consequences, and why no decision is ever taken along the lines of my understanding of it.

In the case of Kerviel’s first trial, the verdict seemed to entirely ignore all that had been said during the hearings. Or rather, to ignore what I had been able to read between the lines of what had been said. And it is this which is without doubt the essential point: is the ruling class incapable of reading between the lines? Or does it know how to do it, but count on the fact that it will, more or less, be the only one capable of doing so and that everybody else – and in particular the average voter – will never be able to do so, and will therefore never ask for accounts to be rendered?


Translated from the French by Tim Gupwell

From the Financial Services Authority’s Final Notice of their decision, dated the 27th June, to impose an 85 million Pound fine on Barclays Bank (less a reduction of 30% for exemplary co-operation with the enquiry) due to their manipulation of the LIBOR interbank rates, two separate periods need to be distinguished. In the first period, which loosely spans the period from 2005 to 2007, rates were manipulated on trading floors by operators at a subordinate level; in the second period, which runs from 2007 to 2009 and which corresponds to the height of the crisis, rates were manipulated by these same subordinates following instructions from above.

Unambiguous figures are to be found in the conversations reported in the documents. During the first period, the rate manipulations were usually around about 1 basis point (a hundredth of 1%) and sometimes 1.5 basis points; in the second period, it was a matter of manipulations varying from 17 to 46 basis points. In other words, they were of a completely different order of magnitude.

When Bob Diamond, the former Chief Executive of Barclays, explained last Thursday to a British Parliamentary Select Committee that he had been “shocked” and “disgusted” by the behaviour of some of his employees, was he talking about the rank and file traders (the dozens of Kerviels that I discussed (in French) in my Friday video) during the period from 2005 – 2007, or about the Senior Bank Officers from the period 2007 to 2009? In my opinion, to ask the question is to know the answer.

That said, as I recalled in my accounts of the ‘LIBOR affair’, from the earliest in April 2008 (L’affaire du LIBOR) [in French], to the most recent (LIBOR: Delayed indignation), it can be said that on the one hand, minimizing the rates submitted by the 16 banks concerned for the calculation of the  LIBOR virtually amounted to a national duty in the climate of panic which had caught hold of the financial markets; and, on the other hand, according to what we already knew in 2008 and which was confirmed in the Final Notice, of all the London Banks it was in fact Barclays which was the most reluctant to falsify the figures. The following observation is representative of this point of view:

“….on 18 September 2008, a Submitter stated in a telephone conversation with Manager D that he would put in a one month US dollar LIBOR submission of 4.75 because that was where he had obtained money in the market…. The Submitter agreed to lower Barclays’ one month LIBOR submission to 4.50. The next highest submission was 50 basis points lower than Barclays’ submission on that day.” (p.30)

Let us be clear about this: 1) From 2005 – 2007, a “dozen Kerviels” working for Barclays regularly submitted, for the purpose of calculating the LIBOR ( at the same time as the 15 other banks), rates that had been manipulated upwards or downwards to the tune of 1 to 1.5 basis points. 2) From 2007 – 2009, in the case reported, a Senior Bank Officer instructed a subordinate to minimize the rate observed by 25 basis points. 3) On the same day, in another bank in the city of London (the one which manipulated the rates the least amount after Barclays), a senior Bank officer instructed a subordinate to submit in the bank’s name a rate which had been manipulated by at least 75 basis points – 25 [like Barclays] plus 50 [additional].

In conclusion, we can say that of the sixteen banks which submitted rates for the calculation of the LIBOR (18 nowadays), fifteen cheated even more than Barclays. This latter had a 85 million Pounds (107 million Euros) fine imposed upon it (before it was reduced), and has lost, since last week, Chief Executive Bob Diamond, Chairman Marcus Agius, and Chief Operating officer Jerry del Missier – who were all firmly shown the door by the FSA, the Bank of England and the Chancellor of the Exchequer. This latter, George Osborne, declared that the facts revealed were “symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees” and added that “fraud is a crime in ordinary business; why shouldn’t it be so in banking?”

We can only approve of the British Chancellor’s remarks. But what do the mangers of the other 15 banks who were responsible for submitting rates for LIBOR think of all this? In any case I would rather be in my shoes than theirs.


Translated from the French by Tim Gupwell

The question of whether a debt contract can be considered as money is central to my book L’argent mode d’emploi (2009). I expose the violence exerted by Joseph Schumpeter (1883-1950), when he imposed the idea that such was the case, and I demonstrated the inanity of the pseudo-arguments that he advanced – employing phrases that often lacked any sense – to support the idea (p. 175 – 180).

A debt contract is indeed another form of money according to Schumpeter, and its amount can be added to that of money in order to calculate the “monetary masses” which constitute the wealth present in the financial system.

The issue can be considered as a purely academic one, a mere question of definition. However, in reality this is far from being the case. When a debt contract can no longer be exchanged for the amount which it was supposed to pay back – because a doubt has arisen as to whether the promised money will be returned or not on the stated day – the dominant economic “science”, that is ‘Schumpterian” economics, prefers to talk of a “lack of liquidity”: a temporary difficulty in converting the ‘money’ which a debt contract represents into actual money, in other words a purely technical problem in the fluidity of the markets.

This confusion between money and debt contracts was what was necessary to allow the systemic risk which underlies the ‘leverage effect’ to be ignored, namely comparing the gains made from interest paid on borrowed money (corresponding to a debt recognition), rather than on money in the strictest sense of the word.

A few us from 2007 onwards insisted on the fact that that the burgeoning crisis was an crisis of insolvability: that there was not enough money around to honour the debt contracts, and that invoking the idea of liquidity was merely a means of masking the gravity of the situation. This also was more than just an academic debate.

That said, the confusion continues. In the Financial Services Authority’s Final Notice, dated the 27th June 2012, in which the British regulatory authority explains the reasons behind the 85 million Pound fine (reduced to 59.5M£ for co-operation with the enquiry) imposed on Barclays bank for its role in the LIBOR affair, the word ‘liquidity’ appears in several places where just the word ‘solvability’ would have been justified:

“Liquidity issues were a particular focus for Barclays and other banks during the financial crisis and banks’ LIBOR submissions were seen by some commentators as a measure of their ability to raise funds…… The media questioned whether Barclays’ submissions indicated that it had a liquidity problem.” Etc. (p.3)

The global collapse of the financial system, the inevitability of which is underlined once more by the LIBOR affair, could have been prevented had there not been this confusion of money with debt contracts, and consequently, of insolvability with illiquidity. Five years later, it is, of course, far too late to lament as an error what economic ‘science’ had hailed in its time as a stroke of genius from Joseph Schumpeter.


Translated from the French by Tim Gupwell

In my Friday morning video (in French), I said that when a pirate (Rupert Murdoch) does business with a ship wrecker (the City of London), it tends to weaken the entire system, and I went on to add that this is particularly the case when the population, which is observing all this from afar, starts to exhibit a certain degree of indignation.

The LIBOR affair has been widely discussed for several days now, due to the 290 million pound fine imposed on the British bank Barclays. My reaction hitherto has been limited to referring back to two articles which I wrote in 2008 at the moment when the story first broke L’affaire du LIBOR  (the LIBOR affair) , published on the 17th April, and LIBOR II ou mauvaise nouvelle pour les subprimes (Libor II or bad news for subprimes), published on the 20th April.

The proof that there has been an evolution in the way the facts are appreciated by the population – still known as ‘public opinion’ – is the fact that what had merely led to raised eyebrows in the spring of 2008 is now rocking the very foundations of the City itself.

To sum up for those who do not intend to re-read my previous two articles: the LIBOR with different maturities ( terms of 3 months, 6 months, 1 year etc) is the interbank rate practiced in London ( the rate at which the banks lend to each other), and is denominated in dollars. It is determined in the following manner: 16 banks in the City are asked to state what rate the other financial establishments charged them for borrowing on the previous trading day. To prevent the figure being fraudulently manipulated, the British Bankers’ Association (BBA) classifies the figures cited from the lowest to the highest, and then ignores the four weakest and the four strongest values, determining the average from the remaining eight.

As I said in my first article (in French), “at a stretch, [the system] can remain reliable even if up to 50% of the parties are not telling the truth. Of course, if nobody trusts anyone anymore, it will be in everyone’s interest to lie, and the published LIBOR rates will be meaningless”.

A news article published in the Wall Street Journal on the19th April led me to conclude in the second article, (in French), “therefore it seems perfectly clear: they were all lying”.

Why would a bank want to cheat? Because it has a vested interest in cheating, and what is worse, virtually everyone, and even more so the general population, has a vested interest in them doing so.

Why would it be in a bank’s interest to lie when it is asked what rate it is charged by the other financial establishments for loans? Because its very existence depends on it; if it tells the truth, its very existence can be threatened. Consequently, we can ask whether asking this question is indeed the best means of obtaining an authentic piece of information. Evidently not; quite the contrary in fact: it is the best means of obtaining a false piece of information.

Included in the interest rate a bank is charged by its lenders is the risk premium that the lender judges necessary to protect it against the risk of default. This signifies that if a bank honestly answers what rates it is charged, it is forced to reveal the poor esteem in which it is held by its peers. This is the reason I mentioned a friend in my second article in 2008 who wondered “why the banks are not asked what rates they charge to lend to others, rather than what rates others charge them?”

If a bank is in difficulty, it has every incentive to conceal this because as soon as the danger is perceived, its rivals are going to bet on its downfall. Why? Because finance is not charity; if there is money to be made, they make it. They do this by using naked positions on Credit-default Swaps (CDS); bets are placed on the collapse of the weakest one. There is no room for sentiment.

As a result, in a crisis situation, each bank will cite a rate lower than the actual figure it is charged; each one will claim that the others are lending to it at lower rates because it is credit worthy. As I wrote in LIBOR II ou mauvaise nouvelle pour les subprimes, (Libor II or bad news for subprimes), “….by manipulating the figures, everyone is trying to conceal how hard they are finding it to finance themselves; in other words, they are trying to hide the precariousness of their situation”

Therefore, it is not even necessary for the banks to agree to conceal the real numbers amongst themselves: it is in the interest of every one of them to manipulate the figures.

The question which now needs to be asked is whether it is a problem for the financial system as a whole if each bank deliberately underreports the rates that others charge them?

The answer is no, quite the contrary, and I will now explain why.

By understating the amount of the rate it is charged by lenders, each bank has helped to present a more positive image of itself than would have realistically been justified otherwise, and also a far calmer image of the capital markets as a whole than would have been the case were the real truth known. And since a considerable number of loans were indexed on the LIBOR, the borrowers concerned benefited as well. In other words, everyone was benefiting from the fact that the lies of the various parties helped to create a far rosier image than the circumstances seemed to indicate in reality.

I wrote in 2008 in my second article about the LIBOR, “The rate for mortage loans in the United States is indexed on the 6 month LIBOR ‘2/28 Adjustable Rate Mortgage (ARM)’, better known under the name subprime

Thus, for as long as an ‘unrealistically’ low LIBOR prevailed, the effects of the crisis were mitigated.

When the authorities required the banks to tell the truth; to reveal the genuine rate at which their peers were lending to them, the 6 month LIBOR immediately shot up 0.33%, which helped nobody whatsoever, and on the contrary, led to a further degradation of the situation.

All this signifies, paradoxically perhaps, that by lying shamelessly, the financial establishments helped to save the system as a whole. Not that this was their real objective; it was merely an unintended by-product. After all this was finance, not the realm of intellectuals or geeks, but that of traders, which meant that if they didn’t understand exactly how it worked, but they had the feeling that it could pay, they wasted no time on reflection and eagerly carried on regardless.

Now the authorities have reacted, and Barclays has been the first to pay the price. But as I had already explained in April 2008, the 16 involved “were all lying” in reality, and so this is by no means over yet.

That said, by maintaining artificially low LIBOR rates, the banks’ deceptive practices have helped to mitigate the effects of the crisis in the larger scale of things; and for the banks themselves, they have minimized the risk of falling prey to the bloodthirsty speculators who were hoping to precipitate their downfall.

So, in this particular case, it would have been better for the regulators (this is not something I generally advocate), to turn a blind eye, since Adam Smith’s “invisible hand” had for once genuinely manifested itself. By pursuing their own narrow self-interests, the banks had involuntarily contributed to the general good.

But with the people/public opinion now in something of a frenzy, an example had to be made of them and Barclays was the first to be punished; it was to be its 359 million Euros fines which would make the front pages.

Why a fine rather than any other type of punishment? Firstly, because money is the thing which costs the banks the least, primarily because they make lots of it and because what can seem a considerable sum to the general public is often peanuts to them, having the capacity as they do to pass their losses on to their clients or investors; secondly, because not only are they too big to fail, but also they are too big to be interrupted (too big for it to be possible to stop even the activities in which they have behaved disgracefully); and finally, by virtue of the fact that with the financial sector having provided financial support for electoral campaigns in return for the decriminalization of financial misdemeanours, it is donkeys’ years since any bankers have actually been arrested for their crimes. At worst, they have had their wrists slapped, like Mr. Diamond, the chief executive of Barclays, who having been paid 15 million Pounds ( 18.6 million Euros) in 2011 – declared that he would forego his bonus for 2012. The people, astounded by so much generosity on his behalf, bowed down immediately to thank the Lord, while the inaction of the regulators seemed to demonstrate that they were convinced that his palpable sense of remorse was punishment enough.

Oh yes! Just a little remark to finish offt. Do you remember the article on The network of global corporate control, by Stefano Battiston and his colleagues, in which it is explained that the world is controlled by 147 companies with tightly-knit interests? In the list of the top 50, guess where Barclays is to be found? You guessed it! Yes it really is the N°1! (See here, Page 33)


How credit default swaps will have destroyed the Euro

12 juin 2012 par Paul Jorion

And what of the CDS (credit-default swap) speculators who don’t pay taxes? Why don’t we hear anything about them? We hear a lot about the Greeks not paying their taxes, and at the moment, due to the tactlessness of some, we hear a lot about international civil servants (more precisely those of the International Monetary Fund) who don’t pay taxes, but, in the case of CDS speculators who pay no taxes, goodness knows why – not a word!

It has to be said that it is not so simple to find out who they are exactly because they constitute part of the shadow banking sector. Which is what exactly? It is non-regulated finance. Why is it non-regulated? Because it is these people who pay the salaries of the lobbyists who draft up the financial regulation laws (and sometimes other laws too), which the elected representatives then receive ready-made, and which only require signing-off.

Being in the shadows therefore, we don’t really know who they are. Do they never explain who they are? Well yes, in a way: when a speculator speaks on his behalf, he always employs the same expression: “people acting with due care and diligence”. When a speculator explains what he does, he starts his phrase with “people acting with due care and diligence ….” For the remainder of this article I shall therefore designate the speculators as “people acting with due care and diligence”, and it will be clear who I am talking about.

When the Greek collapse was imminent, people talked a lot about the responsibility of the CDS for what was happening. Now with regard to Spain, not a word! Why have people stopped talking about credit default swaps? I don’t know, unless it is as in the Jacques Brel song “On n’oublie rien de rien, on s’habitue, c’est tout” (We don’t forget anything about anything, we just get used to it, that’s all”)

How will Credit Default Swaps destroy the Euro? I will explain. First of all, a reminder that a CDS can play the role of insurance for a debt.  Imagine you have lent 100 € to Oscar. As you are not sure of being paid back, you address yourself to Eusèbe who insures you. Every month you pay 5 € to Eusèbe, and in return for this premium, Eusèbe will pay you any money that is missing at the end. Oscar only gives you 75 € back? Eusèbe will give you the missing 25€. Oscar has vanished into thin air? Eusèbe will pay you, on the dot, the missing 100 €.

That’s what is called a ‘covered’ CDS position. Now let’s turn to the ‘naked’, uncovered positions. Pay close attention, this time it’s more complicated because there are now four people involved: there is also Jules and Gontran. Jules has lent 100 € to Gontran. I visit Eusèbe and I ask him to insure me against the possibility of Gontran not paying Jules back. Why would I do that? For goodness sake! Because I am a person acting with due care and diligence of course (I swear, some people ask the strangest questions!)

I won’t explain why it has become normal to call a ‘naked’ CDS position: “insuring the neighbour’s car”, I’m sure you have understood.

Naked CDS positions will be forbidden in Europe from the month of November. Why have we waited so long given that these naked CDS positions had already led to the collapse of Greece in January 2010? (Here we go again, people asking the strangest of questions!) Because there was still Spain, Italy and France…. to be sent to the scrap yard, then to be sold on in bits at attractive prices to those prudent (forward-thinking) ‘people acting with due care and diligence’ who had put some money aside.

How do these people acting with due care and diligence cause the collapse of a country? Once again, I’ll be brief: they insure the neighbour’s country. As they are (at the least) four times more numerous than those who insure their own country (and who have really something to lose), they inflate swell the demand, leading to a rise in prices.

Meanwhile the economists watching all this say to each other : “Goodness, look how the risk that Gontran doesn’t pay Jules back is increasing. Scary stuff!”

Do the economists not understand then that it is those people acting with due care and diligence who cause the prices to rise? No. In their economy manuals, speculation doesn’t exist: it is not explained. If it is, there is a little footnote which describes how “people acting with due care and diligence contribute liquidity to the market”. End of story.

The price of the CDS premiums increases, because demand increases. The economists calculate the risk that the country won’t repay its debt by effecting a calculation in the opposite sense: from the amount of the CDS premium.

The result is that the day when Gontran presents himself again, in order to lend to him the capital markets require a rate of interest into which they have inserted (it’s called the spread in the newspapers) the risk premium for the CDS market (those genuinely insured people acting with due care and diligence) and, hey presto, to borrow over 10 years, Gontran is asked to pay an interest rate of 28.9% ( as is the case for Greece at the moment according to Bloomberg) and it’s all over for Gontran: the troika is already knocking at his door explaining how to become a serf, and how it’s not too bad after all.

But wait, it’s not yet over: the funniest is yet to come! An insurer has to have reserve funds, doesn’t it? In that way, if something unforeseen happens, it can draw on its reserves. In the majority of cases, this will be enough and if it is not the problem is posed only for the difference between the sum to be paid and the reserves, which will, at least, have softened the blow. But in the case of the CDS (and here I see some of you laughing your heads off because you can see what is coming) the CDS are in the shadow banking sector! What would be the point of being in the shadow banking sector, if in this shadow banking sector, one were obliged to keep reserves as one would in the (idiotic) daylight sector?

So, no reserves to cushion the blow in case of a problem, and as there is -as I have said – (at least) four times more people acting with due care and diligence who have insured their neighbour’s country than those who are really running a risk………

And this is why, to cut a long story short, CDS will destroy the Euro (or at least, it, given that, from the way in which it started…..)


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…)

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

“No Matter What We Do, It Will Still Be The Same”

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 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.

MASTERS OF THE UNIVERSE: About “The network of global corporate control”, by S. Vitali, J. B. Glattfelder, S. Battiston

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.

TAVAKOLI vs. JORION. The Subprime Crisis: an orchestrated or spontaneous Ponzi Process?

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.

Human Complex Systems and the Current Mess

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 ?


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.