[NYTr] How to Protect the Real Economy

[All the News That Doesn't Fit]

[Note: the URL below lists the article as in docs_2006. If correct,
the URL suggests it is a year old. It isn't, it is from the September
2007 issue.-NYTr]

sent by Rich Winkel (activ-l)

Le Monde Diplomatique - Sep 2007
http://www.truthout.org/docs_2006/083107G.shtml

How to Protect the Real Economy

By Fridiric Lordon
Translator not listed

As a complement to his article published in the September Le Monde
diplomatique edition, which analyzes the financial crisis that ensued
this summer from the American real estate loan market (read "Quand la
finance prend le monde en otage") [When Finance Takes the World
Hostage]), Fridiric Lordon presents, in this article exclusive to our
Internet site, his reflections about finance... and the ways to limit
its supremacy.

These two articles are the subject of a debate at:
http://blog.mondediplo.net/-En-debat-. [note from Le Monde diplomatique]

It could be that there is some truth in the popular adage that "it's an
ill wind that blows no one any good" - but then one must go flush out
what that "good" is wherever it is hiding... Of the credit market
crisis that stupefied workers confusedly, but aptly, sense they could
end up paying for, one can at least say that it offers an opportunity -
not to be bungled under any pretext whatsoever - to take stock of what
it costs to concede everything to the financial sector and an
opportunity to finally decide to break its grip.

Moreover, the spectacle of market turmoil, images of hysterical
traders, of fund managers sweating agony and of central bankers wan
from insomnia can by itself, in the heat of the moment, sufficiently
impress the mind to support a political demand for action against
speculation.

The "spectacle" window is, alas, just about as short-lived as the real
effects of the financial crisis can be long (and painful) to digest.

Testimony to the strength of the impact of forgetfulness and to the
inability to establish the connection between successive aggravations
of unemployment and the financial accidents that preceded them is that
a six-month interval is sufficient for people to lose sight of the fact
that the latter caused the former. There is reason to believe that
financial liberalization would have had a rough time had the political
organism clearly perceived the cause and effect link between the real
estate speculation crisis at the end of the 1980s - the same one that
very nearly carried off the Cridit Lyonnais - and the violent reversal
of the economic cycle of the early 1990s, between the monumental
monetary crises that nearly volatilized the EMS (European Monetary
System) in 1992-1993 and the murderous peak in unemployment of
1993-1996, between the bursting of the Internet bubble in 2000 and the
rupture of economic growth of the years 2001-2004...Consequently, if
the financial crisis of 2007 may have any political "utility" at all,
as we await the damage it could diffuse throughout the real economy,
it's as an opportunity to become aware, the prerequisite for a
political strike.

1. "Transparency" and "Regulation" or the Policy of "Forever Talking"

At the rate things are going, however, we are not taking that route -
and how can we be surprised: although not the most numerous, the
enemies of this insight undoubtedly remain the most powerful. To
realize that is the case, it's enough to consider the derisory measures
French President Nicolas Sarkozy is implementing with respect to the
inspection of finance - it's "Verdun, no passage!" but armed with a
popgun... And the cork in the gun is, moreover, rather worn from having
been too frequently used, since it's a question of the indestructible
appeal for "transparency." A third level argument, deliberately
ignoring fundamental market mechanisms that express the most profound
characteristics of finance's present structure, "transparency" - or
rather its absence - is typically one of the peccadilloes that are all
the more easily let go in that they allow the essentials to be saved.
The international financial crisis of 1997-1998 that very nearly swept
away the totality of the financial system had already been put down to
"opacity" and with all the cleaner conscience, however mixed with a
dubious stench, in that it was all about "emerging markets" - that is,
a part of the world "not altogether developed" that still had "progress
to make" in order to apply Western norms... The problem with the
immaturity diagnosis is that it collapsed as soon as the "advanced
world" experienced financial panic in 2000 in its turn and that, in
fact, because it was a victim of the same causes - generically,
liberalized finance. One could at least have believed that that farce
would have disarmed the "transparency" topos, reserved for "savages."
Not for a moment! Under barely different forms, it was the opacity of
the Enrons and Worldcoms, miscreants opportunely pushed to the
forefront of the stage who bore all the sins of the world in order to
better make people forget what that crisis owed to the deregulated
structures of the capital markets. Several years later, on account of
having learned nothing, or rather on account of having wanted to learn
nothing, the same causes, allowed to remain the same, produce the same
effects... and it's the same "transparency" brew we are served up again
as a purgative for the bad humors hoped to be transient.

If transparency as a weapon for the stabilization of finance were not a
perfect illusion (1), there would be at least one good reason not to
expect to see it implemented: it is imperative that opacity remain the
recurrent candidate for explaining crises as long as possible. So, no
more opacity, no more distraction! As long as it lasts, at least the
governmental and financial elites may take attractive poses as they
make resounding and vibrant appeals for "regulation." Thus, is the
eternal return of financial crisis also an eternal return of empty
declarations and inconsequent proposals, of voluntary blindness and of
analyses that look elsewhere, an eternal return of a prototypical
sequence all the stages of which we already see unfolding in impeccable
order: 1) solemn political exhortations for "regulation," 2) protest
from financial capital, which declares all legislative intervention to
be absolutely harmful, 3) alternative proposals from the industry for
"self-regulation," by means of the creation of a "work group" that will
make a report and makes wind, the whole thing piloted by a schedule
that, time passing and forgetfulness winning over, will better help the
whole affair end in the sand.

Based on experience and contrary to all the preconceived ideas
ordinarily conveyed by the system's bought experts and friends, it
appears that the United States is significantly less [free-market]
liberal than European countries. At least the bursting of the Internet
bubble gave birth to a true law - cries of horror narrowly stifled in
France and truly because the Americans are the only ones who can allow
themselves to legislate capitalism since their free-market liberal
credentials are otherwise unimpeachable. The Sarbanes-Oxley law (2002)

thus drastically toughened the dispositions controlling accounting -
besides company heads complain about it enough, although one can never
know to what extent that reflects real discomfort and what extent their
propensity to whine over any proposal. But that law is based entirely
on the hypothesis of "miscreants," and could not in any case purport to
attack the true causes of financial instability. And France during that
time? At that moment under a "Socialist" government, and subsequently
during the Jean-Pierre Raffarin period and very given-over to the idea
of making the Americans pass for comparative Stalinists, it... did
nothing.

The managerial and owners' howls about the law's totalitarianism
immediately met an understanding echo there and the government allowed
the Mouvement des entreprises de France (Medef) [Movement of Companies
in France] to pilot work groups and the drafting of reports, such as Mr.

Daniel Bouton's report (2), that had no other end than to prove the
superiority of capital regulating capital, the equivalent in its line
of a call to chastity by virtue of the restraint exercised in a
military field brothel.

2. Speculation as the Art of Hostage-Taking

We must remember all these facts if we wish to avoid the repetition of
the much-traveled and already-prepared-for-reuse sequence:
"Regulation / Self-regulation / Nothing"... and a new crisis in four
years. And that is all the more true in that once again speculative
finance has demonstrated its cunning at taking hostage the very people
and institutions supposed to oversee it, that is, central banks - and,
in fact, beyond them, the whole economy. The strategic instrument for
this complete reversal of the balance of power between the supervisors
and the supervised is called "moral hazard." "Moral hazard" is the name
given to an agent's propensity to overexpose himself to a certain risk
when he knows himself to be insured against that risk. But, people will
say, no one formally insures speculative risk. Don't financial
operators who have taken adventurous positions take the corresponding
losses on their books along with the key possible sanction of
bankruptcy? Undoubtedly, but - and such is precisely the paradox of
moral hazard - not beyond a certain level of risk. Or rather, more
exactly, not when a global risk that far exceeds the specific risk is
concentrated in the agent under consideration. The problem is that, in
fact, the discomfiture of a small number of agents may have
consequences that extend well beyond their individual accounts. For the
default (3) of one interrupting payments promised to others puts the
others in danger in their turn, eventually to the point of provoking
their own default, consequently a further propagation of the
interruption of settlements, etc. Relatively limited and "bearable" in
the real economy, this propagation can prove devastating and of
exceptional seriousness when it touches the financial and banking
sector.

This collateral transmission of financial tensions, of agents in
default towards a priori healthy agents bears the name in economics of
"externalities." Now the peculiarity of market crises is precisely that
they activate these negative externalities, along which financial
distress propagates in cascade. Those are the situations where the risk
of a general collapse becomes such that the central banker, faced with
the enormity of the consequences, has no other choice than to save
everybody, and first of all those most-exposed "players," those the
bankruptcy of which threatens to carry off the whole system. Thus,
these modern heralds of deregulated finance, arrogant and looking good
when markets are rising, this avant-garde of market ideology that - no
doubt in search of justifications for its obscene profits - has nothing
but individual "merit" and "responsibility" on their lips, are, in
fact, the perfectly irresponsible actors whose wagers must be saved
because their turpitudes are practiced in a very special place in the
structure of capitalism, a place from which they are liable to ravage
the entire economy...

Renewing the eternal partition of the dominant between idiots and
cynics, and separating themselves out from the cohort of the
irreparably devout who will continue to praise financial globalization
even from a pile of smoking ruins, there have been a few in finance
that have seized the immense strategic possibilities offered by this
privileged position they have been given to occupy. If the consequences
of our losses go so far it is impossible for the central banker to
remain indifferent and to not save us from bankruptcy, why not take the
most insane risks, knowing that, in the best case, the profits will be
beyond any measure and that, in the worst case, the disproportion of
risks, consequently the losses, will be such that we'll have to be
saved ?...Many credit John Merrywether, head of the LTCM Hedge Fund,
with having drawn all the conclusions of this reasoning in 1998 and
with having deliberately taken hare-brained bets by openly speculating
on interest rate futures that turned out badly, but to which he had
committed, through successive leveragings, sums exceeding his own
capital by extraordinary proportions.

Consequently, a single incumbent provoked losses that proved to be
colossal - not only his own losses, but also those suffered by the
investors that had confided funds to him, among which were numerous
financial institutions. Too many losses for too many important actors
at the heart of the financial system: without intervening directly
itself, the Federal Reserve had to order a rescue operation (4) to pull
LTCM from its inevitable bankruptcy and to save the bet of its funds
contributors... exactly the same way that nine years later Minister of
the Economy Peer Steinbr|ck ordered several German banks to come to the
rescue of their colleague IKW that lost so much and more on the
sub-prime derivatives market...

3. The Perils of the Liquidity Crisis

So it's this combined threat of moral hazard and systemic risk that
hangs over the present crisis and the probability of which is the
object of everyone's conjectures. For the losses booked by the various
placement funds that specialized in mortgage derivative securities,
RMBS and CDO (5), cause a climate of generalized suspicion to reign,
periodically freighted with the arrival of worrying news - the
shipwreck of two Bear Stearns funds, the quasi-bankruptcy of the German
IKW, the successive closings of funds invested in the sub-prime market
with Oddo, then BNP-Paribas... Now this drip-drip is all the more
devastating in that all financial actors perfectly well know one
another to be invested in these catastrophic derivative products. But
to what degree exactly and at what level of potential losses? That
uncertainty, particularly intensified by the crisis situation, throws
doubt on all signatures, and, with each dreading the imminent
announcement of new skeletons in the closet, no one wants to lend to
any one any more. The result is severe tensions in the monetary market
where banks refinance one another. Thus, the days of acute crisis
(August 9, August 16) distinguish themselves by peaks in the overnight
interest rate (6) for interbank credit. Yet the continuity of interbank
credit is absolutely vital, since the maintenance of banks' capacity to
assure their commitments is conditional upon it. Here is the real
epicenter of the risk to the system the present crisis potentially
carries. Should several particularly suspect banks no longer be able to
refinance themselves and encounter serious liquidity problems, there
could be general panic.

4. The Hog-Tied Central Bank

We're not at that point yet. But all the mechanisms of finance act in
concert for the worst in a crisis situation, the markets' whirlwind
puts interbank credit under high tension since the natural move for
investors is to withdraw their capital invested in the investment funds
managed by the banks, which must then confront unanticipated liquidity
withdrawals.

On top of which, even when they have not themselves directly invested
their own funds, banks continue nonetheless to be exposed through
having widely lent to other actors, the Hedge Funds which have not used
the back end of the shovel as far as scabrous investments are
concerned... and will not be slow to encounter problems in servicing
their own bank debt.

In this way, the financial crisis sees an accumulation of risks from
diverse provenances but deadly in their synergies, the summation of
which takes place in the interbank credit market, the holy of holies,
the central mechanism of the whole financial clockwork - and well
beyond that, of the whole economy - the one thing that must
imperatively be maintained in a bath of oil. One has no trouble
understanding that central bankers should go on a war footing at the
least sign of serious tension, since the failures of a few can resonate
and provoke the jamming up of the whole. Here, therefore, is the law by
which, completely reversing their roles, the regulated subdue the
regulators: private finance plays, has a wonderful time, earns
enormously at first, then is frightened by its own adventures and, if
it has made enough stupid mistakes, forces the paternal figure of the
central banker to give up moralizing to come save it - "enough stupid
mistakes" signifying that the individual failures are so far-reaching
that they cannot remain merely local, but threaten, through the play of
externalities, to activate an overall risk.

And there you have the central banker taken hostage. If he could, he
would happily allow the most imprudent to drink from a well-deserved
cup - that is to say: to undergo the bankruptcy that normally sanctions
the rashest bets. But these particular rash ones are objectively in a
position to drag too many others along in their wake with too many
consequences. Accordingly, there's a balance of power that connects
central banks and financial operators, the latter permanently seeking
to go too far... that is, until the central banker has no other choice
than to come to help them. It's enough, moreover, to see the procession
of whimpering fund managers' heads parading across American stock
exchange channels to demand that Federal Reserve Chairman Ben Bernanke
immediately lower interest rates, as though it were their due.
Comfortably located inside the moral hazard, they have guzzled down
three good years by dint of derivative products as risky as they were
juicy, and now that the party is over, they expect the central banker
to come wipe up the mess.

In their defense, let us concede that they had been enabled in some bad
habits. For they are emerging from almost twenty years of felicity
under the benevolent indulgence of an Alan Greenspan who always
conceded everything to his little darlings. They lived in perfect
happiness through every explosion of financial liberalization under the
leadership of their amiable guardian, who, having long considered the
lessons of the crash of 1929 - perhaps a little too long - showed
himself from the outset to be perfectly inclined to lower interest
rates at the first alarm from the markets. And it's also exactly this
way that "Magic Greenspan" built his wizard aura with a finance sector
in too much of a hurry to transfigure the service of its own interests
into shamanic virtue. The memorable crash of 1987 was his inaugural
feat, proving that reputations are forged in initial ordeals. The fact
is that Alan Greenspan was well served by this matter: assailed by a
market collapse the equivalent of which had not been seen in nearly 60
years, and that barely a few months after having assumed the difficult
succession to Paul Volcker, he emerged with a halo. In retrospect,
there is no doubt that no one will dispute the validity of the
immediate decision he took at the time. That doesn't change the fact
that investors did not take long to understand that they had a friend
there. And, in fact, under Greenspan's mandate, the Federal Reserve
never failed to open the spigot wide to liquidity each time that
a-little-too-disruptive investors got themselves into a scrape.

The habit was so well received that the financial sector ended up
seeing an ironclad safety net. Perhaps it was after the bursting of the
Internet bubble that the deplorable habit was most deeply confirmed.
For, once the time to amortize the crisis had passed, it was from the
continued orgy of cheap liquidity that the next crisis was born... the
one of today. The ultimate talent: Alan Greenspan left just in time,
while the party was going on full bore and just before all the Chinese
lanterns were pulled down. One should have known what was going on from
the truckload of praises Wall Street dumped when he bowed out...

5. 2007, or the Central Banker's Aborted Rebellion

But with Ben Bernanke (7), it's a whole different thing. Finance barks
that it's suffocating and he doesn't do anything. A snarling ambience
at CNBC (8): from the best-dressed to the most vulgar merchants of
financial soup (9), all are frothing at the mouth to the extent that
Ben Bernanke resists their injunctions to reduce interest rates. Oh
those elongated, distended, twisted eructating heads. The good little
interest rate reduction that had practically become a social right of
finance is not at the rendezvous. No one had ever warned them that the
thing could be interrupted one day, and, if at least someone had said
something to them about it, perhaps they would have stopped the party a
little earlier. But there, without even a word of warning, he just
about attacked their human and investor's rights and these gentlemen
are furious.

We must take this tomfoolery and these outraged demonstrations
seriously. Wall Street is very unhappy and that unhappiness is not in
the least superficial. It is the sign that a clash of the titans
started from the very first hours of the crisis. The expression is not
exaggerated because the forces engaged are, in fact, gigantic. On the
one side, finance and the extraordinary sums it puts into movement, the
colossal risks it takes for itself and that it makes the whole economy
run at the same time; on the other, the central banker who has the
power to inflict serious damage...or the duty to come to the rescue.
Now the great novelty of this strategic landscape is that at first Mr.
Bernanke did not seem to have decided to allow the balance of power -
or rather the servitude - he had inherited from his predecessor. Highly
aware, like Alan Greenspan in his day, that the first blows are
decisive, Ben Bernanke obviously seized the opportunity offered by this
crisis to strike - while the iron was hot and as violently as necessary
- another relationship with the markets. So the power struggle opened
that way, no doubt with the ulterior motive on Mr. Bernanke's part that
a profound revision of finance's habits could only happen through a
punishing incident.

But what exactly is the room for strategic maneuver in this movement
war and how far can Ben Bernanke go in the confrontation without
imperiling things considerably more serious than his own developing
reputation? For the moral hazard and the hostage-taking that result
from it are not only the effect of a lack of willpower on the part of
the previous central banker, but truly that of an objective structure
of interactions that is forced on him. Mr. Bernanke is the last to
forget that; that's why he tries to conduct his own strategy wilily in
the midst of the contradictory tensions he finds himself caught up in.
This delicate course must necessarily include compromises, daily
adjustable.

Thus it is that, camping first of all (10) on his position of refusing
to lower rates, but confronted with the imperative of maintaining the
vital continuity of interbank credit, Ben Bernanke agreed to feed the
money market a very abundant surplus of liquidities on several
occasions during the week of August 9 through 16.

But how long can this compromise - which does not relent on rates, but
cedes on volumes - last? The answer has not delayed in coming. In fact,
pressure on the central banker has continued to mount. That's because,
apart from the daily and continuous verbal fluster, finance knows how
to join action to words. Thus, as of August 16, operators had included
a quarter of a point reduction in the Federal Reserve's overnight rate
in the prices of certain futures markets, and, on top of that, these
are expected even before the next meeting of the FOMC (11)

scheduled September 18! -at the same time a way of openly expressing
their wishful thinking...and of forcing the hand of the central banker
a bit more, since he would be guilty of causing new losses if he does
not prove them right..."Hold me or I'll throw myself out the window!"
August 17, the Federal Reserve ended up agreeing to a very substantial
reduction in its discount rate. We have to believe that the change of
heart was negotiated on an emergency basis if we judge by the delay in
the ignition of some FOMC members, who still held to the initial line
of firmness the same morning and declared that no reduction would occur
"except in the event of a calamity"... before they were - an extremely
rare event - formally contradicted by a spokesperson and the
so-eagerly-expected half-point reduction to the finance sector was
finally unleashed. Mr.

Bernanke tried in vain to save face by threatening that this new rate
could be raised at any moment; the finance sector undeniably twisted
his arm.

6. A "Split" Monetary Policy to Counter Speculation

Mr. Bernanke's problem is that he intervened in a situation already far
too overripe and in which his freedom of action had almost totally
disappeared - a battle virtually lost in advance. Rather than speculate
about the best strategies for getting out of this sort of can of worms
- since most probably one does not get out of it - it is consequently
more useful to start thinking now about the means to avoid a new can of
worms from forming a few years from now.

Let's immediately say things clearly: the true solution to this matter,
the one that must imperatively remain on the horizon of an alternative
policy, will consist of closing the casino for good and throwing the
roulette wheels into the fire! For it is obviously the latest hypocrisy
to vituperate, index finger raised ` la Sarkozy, against the
aberrations of finance when one hasn't the least desire to transform
the structures that invariably give birth to them. But we know how
distant this political perspective remains, notably in the framework of
the European Union, which has had the good taste to rank free movement
of capital in its Constitutional Treaty's "Charter of Fundamental
Rights"...

and the ideological tendencies of which, as well as the vital interests
of certain members, notably the United Kingdom, ardently desire
deregulation in general and financial markets' deregulation in
particular.

So, keeping in mind this ideal of radical re-regulation of the
financial sector, it is pertinent to think of everything that it's
possible to do now, with constant structures, to slow down crazed
markets. The idea of the SLAM [Shareholder Limited Authorized Margin]
(12), as a ceiling imposed on share income to disarm its unlimited
demands typically fits into this program in the medium term. But the
SLAM returns only the hubris of financial ownership to good order, that
is, the single compartment of share markets. And it would be no help in
the credit markets compartment that is the source of the present crisis.

There is, however, a vital condition for this last compartment - but it
is so general it concerns all of them - that is, the good
administration of liquidity. It's the constant outpouring of funds that
creates share price inflation. But where do these funds come from?
First of all from the income savings the great institutional investors
(pension funds, mutual funds (13)) collect, but also - as though these
first piles were inadequate to amuse themselves with - from the
supplementary liquidities granted to various operators in speculative
finance through bank loans. Now, we can well see in this second source
of finance for speculation a pressure point for political action and
that by means of one of its most classic instruments: monetary policy.
The joyous delirium over derivatives - presently mortgage derivatives,
but it could be any other kind - would never have taken on the same
proportions had it not been obligingly fed by truckloads of liquidity
obtained through bank credit, itself encouraged by cheap refinancing
from the central bank, the rates of which have been maintained at very
low levels from the first cuts of 2001-2002 until mid-2004.

People will first of all say that bank credit is not the whole story
since the fuel injected into the markets also comes largely from
savings accumulated beforehand. No doubt, but at the very least, bank
credit does not count for nothing! And, to the extent of its own
amounts, there is already a contribution to speculative activity there
that offers an immediate target for coercive regulation through prices
(interest rates).

But people will object that if interest rates are raised to asphyxiate
speculation, the real economy will, by the same action, find itself
deprived of air. An objection that is certainly valid. But not
unanswerable.

Valid, in fact, since the same rates that one would like to be
murderous for finance are also those that condition household and
business credit and could be deadly to them. So here is the dilemma in
which the central bank finds itself entangled during a period of
financial liberalization: it does not have an instrument available for
two goals. If it reduces rates to support the real economy, by doing
so, it opens the doors wide to speculative euphoria - whether it wants
to or not. Should it want, on the other hand, to control inflation in
financial asset prices strictly, then it penalizes the real economy -
which has nothing to do with that inflation - by the same method. We
know what choice the Federal Reserve made under Alan Greenspan's
presidency: real growth and the financial bubble. But that's a
short-term calculation that is doomed to the collisions of a stop and
go that people believed had disappeared since the 1970s, but which has
returned in another form: during a period of growth, the bubble expands
exponentially... until the speculative collapse in which the real
economy can find itself dragged by way of the credit contraction that
ensues when banks, strafed by bad loans, brutally stop lending to
everyone.

We will not escape from this dilemma as long as the shortfall of
instruments with respect to the number of goals remains. But why not
quite simply envisage a split in the instrument (the interest rate)
each declension of which would be reserved for one group of specific
agents: one rate for the real economy, one rate for the aficionados of
speculative roller coasters? In that case, nothing would prevent
preserving a first, "economic" interest rate for agents of the
productive economy, and assigning a second "speculative" rate for the
exclusive use of the financial market. Then one could simply tighten
the screws on the latter without the least fear of harmful consequences
for the real economy, with the prospect of stopping speculative booms
before they start, and that with the double advantage of, on the one
hand, getting the central banker out of these impossible hostage-taking
situations - quite simply by avoiding from the outset that these
situations have any possibility of developing - and, on the other hand,
of considerably stabilizing the environment for productive activity,
now subject to the boom-bust alternation.

7. To Strike at Finance and Spare the Economy

But concretely, how would that work? The central bank establishes two
sorts of financing relationships with private banks. The first are
strictly bilateral. Periodically, each private bank calls on the
central bank to submit an individual request for refinancing. It is
very possible for the latter to respond to that request by splitting
the volume accorded into two as a function of the outstanding loans the
private bank has accorded respectively to the real economy and to
financial activity during the period just past. It goes without saying
that these two volumes of refinancing will be allocated by means of
their differentiated interest rates, with the refinancing of credits to
the economy being effected at the "economic" rate and that of loans to
market activity at the "speculative" rate, with nothing then preventing
that latter rate being brought to prohibitive levels.

Setting aside bilateral relations, it also happens that the central
bank is called on by the totality of the interbank market (14) in which
it behaves as an "ordinary" player, by buying or selling bonds, that is
by extending or tightening global liquidity. In this second, "open
market" procedure, the preceding move is clearly more difficult to
accomplish since the pro-rata formula makes most sense in the context
of individualized help extended by the central bank to private banks.
One may imagine several kinds of solution, perhaps a bit crude and not
perfectly satisfying intellectually - knowing at the same time that
it's not a question of a competition for elegance and that as far as
crudeness is concerned, speculation authorizes many others... Thus, one
could, for example, imagine that the central bank divides the global
volume of its aid to the interbank market as a function of the
proportion of the average of economic loans/speculative loans realized
by all banks - with the drawback that "moderate" banks (those more
focused on the real economy on average) would pay for the others'
pranks. One could also imagine that the central bank "re-individualize"
its open market aid.

After all, it has the means to know with which bank it is transacting
and to apply to each interlocutor the pro-rata that it already imposes
on it in bilateral procedures.

Undoubtedly, the friends of finance will find much here to dispute,
those people for whom nothing is possible when it's a matter of reining
in markets. And, undoubtedly, the formula advanced here remains rather
rough-hewn as yet. At least it has the virtue of reminding us of this,
in fact rather simple, and even tautological, obvious point: we will
not get rid of the harm speculation does to the productive economy
without decoupling the real sphere from the financial sphere in one way
or another. We could say that this decoupling already exists since we
more often than not see the financial sector euphoric, while growth
lags and unemployment climbs! But that particular decoupling is
asymmetrical: if finance knows how to stay healthy when production is
flat, the opposite is not true. And the bad aftertaste of speculation
too often flavors the real economy. By the natural effect of historical
amnesia, added to which is that of the dominant powers' interest in
collective forgetfulness, we have forgotten those rather judicious
arrangements that the New Deal had the wisdom to establish following
the crash of 1929. The Glass-Steagall Act was no dead letter at the
time... It was even very much alive since it had drastically separated
banks into commercial banks on the one hand and so-called investment
banks on the other, with a categorical prohibition against the former
venturing onto the fields of the latter, and vice versa. Thus,
commercial banks remained in contact with agents of the real economy
and only with them and no one had to worry about a speculative bouillon
affecting that activity. "Categorical prohibition"... words that make
us dream, and the meaning of which, although sometimes very salutary,
has been lost from view. The ideological work of neo-liberalism
[free-market, laissez-faire capitalism] must have been devastating for
pronouncing those words to seem so supremely audacious. Why couldn't
that hermetic separation established by Glass-Steagall be restored
today? Doesn't the destiny of millions of workers, compared to the
extravagant bonuses of a few thousand traders, depend on it? What that
elementary legislative act would do very well, but which we don't want
to see happen because we lack the elementary audacity to make the
decision, anti-speculative monetary policy could do in its place in the
meantime.

8. Post-Script. What "hostage-taking?" What "insiders?"

Just as there are nails that need to be hammered in especially well,
notably for the use of the habitually deaf, it is undoubtedly useful to
return for a moment to the real meaning of the somewhat technical terms
"externality" and "moral hazard" for those for whom the spectacle of
successive financial crises calls up no idea and who continue to find
globalization a good thing. It is possible to best penetrate the
meaning of those terms in the present instance by synthesizing them all
under the practical category of "hostage-taking."

It's that, let me repeat, I don't see any other name to apply to that
aptitude, conferred by the occupation of a certain position in the
structure of capitalism, to link one's fate to that of the totality of
other agents for the worst - since, were it for the best, obviously the
latter would replay... Normally, one would agree without any problem to
keeping for oneself the immense profits from speculation, but spreading
the disasters of a crash over everyone, counting, with a sometimes open
cynicism, on the help of the monetary authorities, who will inevitably
have to act in your favor in order to avoid that your calamities
suddenly become those of the whole population - all those behaviors,
one would have to agree, are adequately covered by the category of
"hostage-taking." Thus, the editorial scum, who can never howl loudly
enough about "hostage-taking" when, in the hope of landing a few more
Euros or a few less hours, a transport strike impedes movement for more
than two days at a time, could wonder about the superlatives it could
invent to describe this situation almost as unbelievable as it is
unrecognized as such; a situation by which the tiny minority of finance
parvenus holds a pistol to the head of the whole social body and
threatens - armed with the objective means to make good on their threat
- to shoot if one does not immediately come and prevent their
insolvency.

That the reduction in interest rates and quasi-automatic rescue should
have become de facto guarantees extorted by the financial sector from
the fact of its strategic situation does not prevent people from seeing
retirement at age 60 and the minimum wage as the only archaic social
acquisitions. That traders binge by the millions during the bubble does
not prevent railway workers and civil servants being called ignoble
insiders. One wonders sometimes where this mixture of sanctimonious
myopia and imbecile lesson-giving came from and how long it will last.

It's true that during the period when it lived in high style, the
ancient rigime aristocracy already possessed its satellite class of
parish priests who had their rumble seats at the banquet and the
vocation of justifying everything...

Fridiric Lordon is an economist, the author of "Et la vertu sauvera le
monde... Aprhs la dibbcle financihre, le salut par lb'ithique'?" ["And
Virtue Will Save the World...After the Financial Debacle, Salvation
through 'Ethics?'"], Raisons dbagir, 2003.

(1) See Fridiric Lordon, + Finance internationale: les illusions de la
transparence ;, Critique Internationale, n0 10, 2001.

(2) Cf. http://www.technip.com/francais/pdf/Rapport_Bouton%20_FR.pdf.

(3) Editor's Note. "Payment default," the inability to repay a debt.

(4) That is a refinancing action by the place's principal healthy banks.

(5) RMBS for Residential Mortgage Backed Securities, CDO for
Collateralized Debt Obligations, for a presentation on these
securities, see: Fridiric Lordon, "Quand la finance prend le monde en
otage," Le Monde diplomatique, septembre 2007.

(6) Overnight: from one day to the next.

(7) Ben Bernanke succeeded Alan Greenspan as the head of the Federal
Reserve in 2006.

(8) An American channel of continuous market information.

(9) Including Jim Cramer, presenter on this same CNBC of a program
delicately called Mad Money is one of the most colorful representatives
of this group.

(10) This text was written August 19, 2007.

(11) The Federal Open Market Committee, which sets interest rates.

(12) Fridiric Lordon, "Une mesure contre la dimesure de la finance: le
SLAM!," Le Monde diplomatique, fivrier 2007.

(13) French versions are called Sicav and FCP (Fonds communs de
placement).

(14) Market in which banks with a temporary liquidity surplus lend to
banks with a temporary liquidity deficit.