A review of my just published book L’implosion. La finance contre l’économie: ce que révèle et annonce “la crise des subprimes” by Adrien de Tricornot in Le Monde, dated June 16th (translation by Jiro Tanaka – many thanks Jiro!)

Foresight and Despair (“Oracle, ô désespoir !”, pun on a famous line from Corneille’s play “Le Cid” – 1636).

The author of this work, a Frenchman [truly, a Belgian] in America, has analyzed the financial crisis from a unique cultural perspective, and with a multidisciplinary approach. He is an anthropologist, a specialist in artificial intelligence, a research affiliate at UCLA, a former trader, and an economist all of which allowed him to predict as early as 2005 the subprime crisis, which exploded onto the scene in 2007. In a much talked about book entitled “Are we heading for a crisis of American capitalism?”, which appeared in January of 2007 (La Découverte), he foresaw with clarity the causes and consequences of subprime lending. Paul Jorion experienced the crisis from the inside, picking up the pieces as it happened, and when the bubble burst, he lost his position as an officer at one of the mortgage banks caught up in the storm.

In other words, he is well positioned to explain how the American real estate bubble formed, and how average households were incited to borrow in an untenable fashion, betting on the constant appreciation of home value right up until the house of cards collapsed. In 2006, American households “extracted” 1.019 billion dollars in new loans, based on the fragile value of their homes. Mr. Jorion also describes how the use of erroneous financial models and uncontrolled financial innovations (such as securitization) allowed for a massive abdication from responsibility in the organizational structure of the lending industry. He details with great clarity, and in an accessible manner, the instruments and mechanisms that led to this catastrophe.

But his book also shows that this unhappy experiment owes less to chance, and more to the effects of unbridled financial deregulation. Interest groups such as the Mortgage Bankers Association, which represents real estate lenders, defended this deregulation and found an ideologically sympathetic ear in the Bush administration. Some states however, such as North Carolina in 1999, attempted to ward off the danger and protect borrowers by adopting measures against predatory lending. According to Mr. Jorion, Applied at the national level, this legislation would have stopped the bubble from developing, thus preventing the subprime crisis, as well as the credit crunch that followed.

But that didn’t happen, and the measures that were finally taken to assist households in difficulty are likely to be insufficient. According to the author, writing at the end of 2007, roughly a quarter of the two million borrowers concerned would benefit, but a kind of Marshall Plan on a grander scale would still be necessary. For Mr. Jorion, the crisis has only just begun, and it calls for a complete revision of the rules governing finance. It is a warning to be taken seriously.