Paul Jorion's Blog

August 4th, 1789

Cityislander’s imaginative translation of “La nuit du 4 août” at the French end of this blog. Many thanks to him!

Exactly 220 years ago (the French Revolution), on the night of August 4th, 1789, the question certainly was not about systemic risk. Yet, on that very night, an event of systemic magnitude occurred: the French assembly ended the feudal system and its privileges.

Keeping this historic event in mind, we have to reflect on the fact that we have not yet fully grasped that when systemic risk became an issue in 2007, capitalism wasn’t just going through a rough patch. Rather, it had been mortally wounded. Our politically correct attempts to see green shoots in the economy and marvel at them epitomizes wishful thinking.

The old fashion way to save capitalism, the socialization of losses, proved insufficient, this time to absorb the sheer size of the systemic shock, only matched by the enormity of the debt binge that caused it over the past 35 years. Tax havens had allowed the wealthy to evade the IRS, leaving the middle class to pay for the bailouts. This time, however, the price tag is simply unaffordable.

Without a viable solution, we look the other way and comfort ourselves with the illusion that things will heal over time; a propaganda, that is generously fed by the establishment. Isolated havens of prosperity have emerged, the pitiful benefits of the purported trickle down economics behind the massive bailouts.

The less fortunate were left to face dire prospects on their own, while at the same time the available resources were given in priority to the few banks still standing, thereby confirming the oligarchy theory. Looking back, they seem to have been pulling the strings all along. Lehman Brothers, declared bankrupt on Sep 15 of last year, was a rival of “Government Sachs”. Wasn’t it meant to happen, then?

In the heydays of finance, competition was rife between banks, yet markets were deemed resilient. The high-jacking of capitalism by banks, however, eventually brought it to its knees. With the benefit of hindsight, we’d like to think that everything would get back to normal if only we got rid of the bad guys. Alas, our awakening comes after the fact. The goose that lay golden eggs is gone.

In spite of occasional rallies, under IV therapy by the government, Wall Street’s attempts to resurrect its glory are eventually deemed to failure and will only reflect the desperate attempts of its kings to stick to power.

When the new system takes over, we will not see it for what it is: the replacement of a broken system by a new one. Rather, we will clamor that reason won over a corrupt elite, that drowned in its own excesses.

Paul Jorion

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6 responses to “August 4th, 1789”

  1. If I follow the logic of this post, to say that saving the system by reaching deep into taxpayers pockets is no longer an option presumes that there are still hidden losses in the system, in spite of previous bailouts/TARP, permitted, I guess, by a shift from m-2-m to cost accounting with the blessing of congress. At what point will this come out with a vengeance? And what happens then? Nationalizations? Trading debt-for-equity?

    The debt-for-equity in the housing market has left practical questions unanswered, that perhaps Mr Jorion could clarify? Is it that the bank
    – takes ownership of the house ?
    – in exchange for a lower mortgage rate on the family that lives in it ?
    – so that the mortgage payments really become rent?

  2. To anyone who’s interested, here’s a partial summary of the French mirror site’s last post:
    [
    The current crisis has naturally raised questions about the viability of a capitalist system. While two ounces of reason stop us short of looking for of a Utopian alternative, one ounce suffices to see that an unbridled and corrupt financial system is in large part to blame for the crisis.
    ]
    [
    The prevailing economic mantra has elevated the Wealth of Nations, and its modern day derivative (pun intended), the EMH,
    to a pro-market cult, that ignores the basic precept that the pursuit of self interest is only as good as the policies that harness it towards a common good. Conditions that create a competitive market is one of them. Those of us who have adorned Adam Smith on our sleeves need not feel ashamed as long as we also recognize that he also wrote the Theory of Moral Sentiment.
    ]
    From here onwards, it’s my own take on the matter:
    [
    There has been some talk about whether continuous trading has contributed to the crisis. Although such technical questions have merit, given the beyond imaginable evidence of failed leadership, by some, at the helm of some government agencies and in politico-economic circles, one cannot but fear that whatever care is put into drafting policy, it is only but a (dangerous) facade of protection, should contempt for the missions of these agencies remain or become again the modus operandi.
    ]
    [
    One can google search for him/herself this statement by a prominent economist, in defense of economists:
    “The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them”.
    This is so upside down that it leaves me to wonder how this person and I can be of the same species or if it has a double meaning and that perhaps I got the wrong one.
    ]

  3. To cityislander (1)

    I don’t know the answer so let me think aloud.

    In American law as far as I’m aware the borrower is the owner of the house and the bank has a lien on it, meaning that the building itself has been pledged as collateral so that in case of default the bank can repossess, pay itself on the proceedings of the sale and needs to hand the borrower any remaining monies.

    What would debt-for-equity mean in that context? That the bank becomes owner on a pro-rated basis of outstanding loan amount and lets its share of the house to the former borrower? The borrower would then own part of the house and rent the other part from the bank. Each would pay property tax on the share of the house owned by him/it (?)