[OPE] Trichet on risk

From: Jurriaan Bendien <adsl675281@tiscali.nl>
Date: Fri Nov 14 2008 - 14:33:51 EST

I am sorry but I disagree. Mr Trichet is probably a sensible guy, I haven't met him but they don't hire you at the ECB simply because of your pretty face, at least I hope not, because otherwise we are truly in deep shit. But if you ask me to reconcile the irreconcilable, I cannot do it and I will not do it. All I can tell you is that there's a flat contradiction, and that this happens to be mediated in certain sorts of ways, for better or worse.

Karl Popper drew a useful distinction between a logos of discovery (the essence of science) and a logos of justification (ideology, rationalisations, ethics, apologetics). Talk of "a unit of risk" is nonsense because no such measurable unit exists. There exist only specific risks which materialise or fail to materialise, with a financial and human cost. I regret it that Mr Trichet talks like this, because it is gibberish. It's a logos of justification. The value of a financial risk can substantially only be specified in terms of the amount of money the lender requires as safeguard against capital loss, or what the borrower is prepared to pay to insure himself against the risk of capital loss. If somebody can specify the aggegrate credit volume which is sustainable longterm, I'd like to see the argument.

You argue:

"And yes, if banks had charged more money and bigger insurance premiums for risky loans, the crisis would have been avoided. The crisis is a consequence of risk criteria proper of gambling brought to the official market of loans, made possible by Bush government."

I do not think this argument is either technically correct, historically correct or morally correct as a whole, though there is some truth in it. The short of it is that imprudent lending and borrowing occurred, based on inadequate evidence and unprovable economic theories, which is morally irresponsible and scientifically unsupportable. A profitable insurance system developed to insure against losses in capital value, based on expectations of future yield. If the "real economy" turns out not to support that expectation, the house of cards falls down. I have mentioned before on OPE-L with reference to FASB etc. how financial assets developed whose value was basically unknown, fiduciary or hypothetical, their value could only be probabilistically estimated using theoretical accounting assumptions. The overextension of credit led to the partial breakdown of the system, so that the insurance system goes in reverse gear: it creates more insecurity for everybody.

If the risk-pricing was wrong, the question arise how you would price it correctly. Nobody could give a definite answer to that, basically because it just depends on the state of the market. But this side-steps the real issue, which is that a kind of trade developed, which we ought not to have at all, because it is not beneficial to society; it is parasitic to the extent it just siphons off claims to already existing resources on the basis that the money to pay for those resources will exist in the future. It's a sort of sleight of hand. The Greens worry about the future of life on the planet, but this is a sad joke when you look at what the rentiers are actually doing, displacing the consequences of present activity perpetually in space and time.

If you trade in insurance risks, and doing so just makes life riskier for all people, this is perverse and harmful. Everybody has to take risks and a certain amount of risk is healthy, but gambling with the fate of humanity when it's not necessary, is definitely unhealthy. The ideology is about "courageous risk-taking" but in reality the whole system is about INSURING owners of capital AGAINST risks, to make their existence risk-free. This is defended with the idea that, with this insurance system in place, we can invest more in productive activity than we otherwise would; without it, all sorts of investments would be impossible. To some extent this is obviously true, but now look at the aggregate data, the aggregate outcome - the amount of capital brought into being dwarfs what is actually invested in production. Hence, new philosophies arise such as, "what is production anyway?" and then the philosophes say things like, "GDP doesn't measure wellbeing" etc.

But this train of reasoning is unpalatable to the elites because they want to be able to trade what they want to, when they want to, and they encourage everybody to do the same. The ideology of risk (a concept with which you can go all ways) is just a convenient "peg" to hang this on. Life's an adventure, and if you own a hundred million dollars, and you lose 10 million, so what? Who are you to say what is beneficial? You still have the 90 million. If 200 jobs disappear as a result, well that is tough but "it is not my fault", it was just that the state of the market changed. The risk is in the market, but I cannot take responsibility for what the market does, so the reasoning goes. In this way, you can nicely fudge who is responsible for what.

All the regulation schemes proposed so far really argue, is that the individual lending and borrowing party should be more aware of the potential risks there are ("disclosure"), and insure themselves even better than before. But nobody can specify all the risks there are, at most they can specify the most likely risks which they individually could face, but what the monetary value of that is, cannot even be specified for certain. There is only one surefire way to address this problem, namely to say that "we will not lend or borrow for this or that type of activity", but that is actually what they are very reluctant to do; and even if some activity is prohibited, the chain of claims may be extended a bit further, to get around the prohibition.

In the end of course the elites have a pretty good idea of what is beneficial to themselves, and therefore (by extension) of what is good for society, and therefore in the end they will indeed "not led or borrow for this or that type of activity". Mark my words. This could have quite totalitarian implications (aside from economic crunch), and a worker is quite entitled to ask in that case: "who are you to say what I may lend or borrow"?

I am reluctant to simply blame bankers for the problem as "evil doers". I don't think that is how it really works. Somebody can go to a bank for example and say, "look I have this asset with a certain yield and I want to borrow money to buy another asset with a certain yield", the bank says yes, then the borrower goes to another bank, and says "look I have an even bigger asset now, and I want to borrow more money", and so on, the assets and liabilities just proliferate. Then non-bank institutions say hey, "this is a good game, we are going to do this too" and pretty soon everybody is doing it. What is the result? Nobody can really specify anymore what the overall risks are. When shit hits the fan, everybody has to "deleverage", and then you hope it won't take too long. But meantime you get more conservatism and mistrust, lives are ruined, the exact opposite of the "dynamic, revolutionising system" which capitalism is supposed to be.

"Productive forces and social relations - both of which are different sides of the development of the social individual - appear to capital only as a means, and only means to produce on its limited basis. In fact, however, these are the material conditions to blow this basis sky-high." (Marx, Grundrisse. Frankfurt: EVA, p. 593)


ope mailing list
Received on Fri Nov 14 14:36:13 2008

This archive was generated by hypermail 2.1.8 : Wed Dec 03 2008 - 15:07:39 EST