By Frédéric Lordon Le Monde diplomatique Translated for Truthout 8/27/07

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]), Frédéric 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: [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 Crédit 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 Steinbrück 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 à 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 régime aristocracy already possessed its satellite class of parish priests who had their rumble seats at the banquet and the vocation of justifying everything…


Frédéric Lordon is an economist, the author of “Et la vertu sauvera le monde… Après la débâcle financière, le salut par l’’éthique’?” [“And Virtue Will Save the World…After the Financial Debacle, Salvation through ‘Ethics?'”], Raisons d’agir, 2003.

(1) See Frédéric Lordon, « Finance internationale: les illusions de la transparence », Critique Internationale, n° 10, 2001.

(2) Cf.

(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: Frédéric 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) Frédéric Lordon, “Une mesure contre la démesure de la finance: le SLAM!,” Le Monde diplomatique, février 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.

Translation: Truthout French language editor Leslie Thatcher.