Paul Jorion's Blog

The House is on Fire!

An English translation of Feu en la demeure !, posted on my French blog on February 25.

Ladies and gentlemen of the European regulatory authorities, I am today turning to you: the house is on fire!

Demands that Greece lowers its civil servants’ wages will not save her. Your prodding Greece to tackle tax evasion will not save her. Your offer to establish a… piggy bank (how laughable an idea!), will not save her either. All that is far too little, far too late. It is also beside the point.

On February 3rd, I happened to be one of the guests on the English show of France 24 TV channel, ”The Debate”. For our sake, I beg you to hear what I had to say when the discussion bogged down on whether or not Greece cooked the books on its economic statistics. This is how I then summarized my address:

I am saying, we are witnessing again someone playing a little game with Credit-Default-Swaps (CDS). But this time, it is not, 1) Bear Stearns, 2) Lehman Brothers, 3) Merrill Lynch, it is, 1) Greece, 2) Portugal, 3) Spain. The doings of the financial markets, these past days, are not unlike George Soros’ coup that sank the British Pound in 1992 (and some think that the economic « science » renewal lies in his hands!).

Your little piggy bank in support of Greece, established after such travails, will last but a few hours in the storm, and immediately following that, four more will be required, one for Portugal, one for Ireland, one for Cyprus, and the next, for Spain, a much larger penny bank than the others put together.

Then, you will have a few days in order to catch your breath, the next target not belonging to the euro-zone: I am speaking of the United-Kingdom.

We are not dealing with wages being too high: what we are facing here a domino effect, in the same way Lehman Brothers’ name was spelled out in the sky the day of the fall of Bear Stearns, so will the name of Portugal be carved in heavens when Greece defaults.

What is to be done? Aim the spotlights towards the source. Towards the lethal combination of national debts rating by credit rating agencies with naked Credit-Default-Swaps positions, those bets taken by some with absolutely no personal risk but in the process creating systemic risks by the tonne, all but for one goal: enormous personal gains.

It is time, Ladies and Gentlemen, to consider outlawing speculation on price fluctuations (also known as financial spread betting).
Do not object it is complicated: it is not, it is already written in the spirit, if not yet the letter, of the Statements of Financial Accounting Standards No. 133 (FAS 133).

Do not mention it is going to affect liquidity: my usual response to this argument is that bettors only create liquidity for other bettors and in that it is of no importance whatsoever. But today I am going to add something else: at the present stage of a probable disintegration of the euro-zone: “Who gives a damn about liquidity!”

(Many thanks to Bernard Bouvet!)

Paul Jorion

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9 responses to “The House is on Fire!”

  3. Could we add to that clause of your Economic Constitution which outlaws speculation on price fluctuation
    a part b). outlawing the public expression of official apologies for events and acts for which one has not been personally responsible.

    Thank you

    May I add that I do not feel optimistic about your chances of changing the behaviour of the markets in any meaningful way. Every time something ressembling your descriptions and analyses of the financial system and its derivative products make it through to the media, it seems to herald nothing more than a future total blackout ( we’re talking about a few days max ) and calculated steps backwards.
    But at the same time I do feel that, as far as your blog is concerned, future years will show that this is where is was at, that here at least people SAW, and KNEW, and tried desperately to act on that knowledge as responsibly as they could.
    Without wanting to make a crass comparison, I can’t help thinking of German Jews in the thirties, some of whom WERE able to see and make sense of the events going on around them, some of them had the mental courage to accept the impossible and fatal reality then in preparation… and got out while they could, and saved themselves and their families. Let’s take a page out of their diary !
    For what it’s worth, that’s where I am at the moment !

    Cheers.

  4. I cannot help wondering, but have no reliable information on this subject, if Goldman is alone in this attack. Are Bernake, Summers and Geithner trying to bring down the Euro before the dollars collapses to weaken Europe’s position in the currency market?

  5. Once upon a time there were three little pigs and the time came for them to leave home and seek their fortunes. Before they left, their mother told them ” Whatever you do , do it the best that you can because that’s the way to get along in the world”

    So far the PIGS have not done at all the best they can. I agree, forget about liquidity. Just tax them heavily or ban.