Tuesday, September 16, 2008

Re-Regulation

Rationalité limitée recommends this interview with Michel Aglietta on the current financial crisis but expresses doubts about Aglietta's call for new regulation to ensure that "institutional investors can correctly evaluate the risks" involved in the purchase of certain financial instruments. But "is this really possible?" asks the young economist who writes the blog. This question will be at the heart of political debate in coming months, so it will be important to get beyond the sterile confrontation of "regulation good" vs. "regulation bad." Indeed, there will be new regulation galore, whether good or bad, because the demand for it will become politically irresistible as the crisis widens and deepens.

Yet desire, when it grows strong enough, is endlessly resourceful, and capable of circumventing any and all regulation via recourse to the ruse of reason. Ulysses may have bound himself to the mast in order to resist the sirens' call, to which he knew in advance he would succumb, but though we may be aware of the problem, we never seem to make the bonds strong enough to contain us in our next bout of lust. Since our only defense against the tumescence of greed is appreciation of the potential for subsequent disaster, regulation should focus on heightening awareness of the risk of debacle and of the deceitful wiles of the concupiscence that wraps itself in the chaste disguises of "rationality."

The mad market for credit default swaps is a case in point. No one knows how large it is ($60 trillion, $100 trillion, $150 trillion--that's trillion, with a t), because there is no central repository of information. CDS's are supposed to provide insurance against credit defaults, but it seems that many of the insurers were glad to take the premiums even though they had far too little capital to make good on their promise to pay in case of default. No matter: default was assumed to be rare enough that it was still "rational" to make, and accept, a promise that both parties were (vaguely) aware could not be kept. One party could then assure its "regulators" (whether internal or external) that it was protected, while the other could earn an apparently cost-free supplement to its income. The Lehman bankruptcy and potential failure of AIG will soon reveal just how deluded the masters of the universe were.

In retrospect such arrangements seem irrational to the point of daftness; in prospect they seemed the quintessence of modern financial engineering with its mantra of "risk management." Regulation needs to step back from rationality, even the "bounded" rationality advocated by Rationalité limitée, to the more primitive stage of prudence, which stemmed from a healthy fear of the unknown that no one yet presumed to measure. The attempt to turn all uncertainty into quantifiable risk is the contemporary hubris responsible for the rebirth of tragedy.

Ségo Backs Off

When Ségolène Royal visited Harvard last winter, a dinner was held in her honor. After dinner, she answered questions. I was the first to speak. I began by noting that she had said in a session with undergraduates that her plan at that time was to try to organize a broad-based coalition of the Left ("Besancenot to Bayrou" was the way she put it!) in which the Socialists would join with other parties in a national primary to choose and then unite behind a presidential candidate. I noted that unity was such a good idea that it had spawned a dozen or so rivals all promising to deliver it by taking control of the PS, and then I asked how she planned to get rid of them. Laughter in the audience. A smile from Ségolène. And then her answer, or, rather, her evasion: "I will present my ideas to les militants, and they will decide."

It seems that not enough of them have decided in her favor, so that she is backing off her insistence that the party must unify early behind a presidential candidate and then proceed to designate a candidate of the left via a national primary. Her failure to persuade enough of les militants seems to be responsible for this change of tactic. What remains of the national primary idea in her new strategic vision is unclear at this point. She does not seem to be able to command the party's internal mechanisms, but in the meantime her strength in the population at large is also declining, to judge by recent polls. If she can't impose herself internally and can't impose herself externally, her moment will have passed. It may well have passed already.

Republican Parochialism

I have frequently been critical on this blog of what I take to be outbursts of dogmatic republicanism that have recurred of late in a variety of contexts. At times it seemed that all criticism of dogmatic republicanism was simply rejected out of hand in France, but lately I have begun to hear French voices here and there questioning whether the consensus is as solid, and as firmly grounded, as this reaction might suggest. Now, Cécile Laborde has published a thoughtful piece setting forth what she takes to be the principles underlying the republican consensus and exposing some of the contradictions inherent in those principles. Essential reading.