Tuesday, November 4, 2008

Juncker Self-Criticism

Jean-Claude Juncker has said that Europe badly misunderstood and therefore mismanaged the financial crisis, "which we did not think would affect us." Jean Quatremer thinks this shows that Europe falsely believed it had achieved economic independence from the United States. That may indeed be the correct interpretation of Juncker's remarks, but, if so, I think it still reflects a misunderstanding of the nature of the crisis. For what is beginning to emerge, I think, is a set of European financial problems that are rooted in Europe and not mere side-effects of the ingestion of toxic American assets. European banks used the same "credit enhancement" techniques and structured investment vehicles as the United States. European banks built derivatives on top of derivatives and made risky loans backed by shaky analyses. European banks innovated as aggressively as American banks. At least there are signs that this is the case. We know less to date than we now know about American practices, but all signs are that the mispricing of risk was not limited to American institutions. While Europe has been congratulating itself on quick and coordinated responses, it has been keeping many details out of public view. Just as it was convenient for antiglobalization forces on the left to attack "Anglo-Saxon neoliberalism," so is it convenient now for reeling continental neoliberals (including Sarkozy and Lagarde as well as Juncker) to blame Anglo-Saxon toxins for homegrown ills.


Anonymous said...

There may actually be an "Anglo-Saxon toxin" at the root of all this, namely imperfect risk models that - I would guess - were developed at US universities and then spread to the rest of the world. From the little I know about them, they seem to take the normal distribution as their basic model for the variability of returns. So a lot of the current misery may be due to the fact that geeks like computationally tractable Gaussians, while in the real world the tails are fatter.
And if financial modeling is like the math I saw while working for a speech recognition company, their models will also be full of ridiculous independence assumptions.

Unknown said...

Actually, the French have been leaders in developing financial mathematics and have gone well beyond the normal distribution. The trader who lost a bundle for the Caisse d'Epargne wrote a thesis on Levy processes, for example. But I agree with your basic point, that real-world uncertainty is less tractable than modelers often assume out of necessity.

Anonymous said...

Fantastic. Now that the US presidency is writing history, quid de votre intérêt sur la vie politique française, au pays où on discute encore sur le choix de Fadela Amara ?

Leo said...

I think that there's more to the so-called Anglo-Saxon toxin than risk pricing technicalities.

To my mind, the root causes of this mess are ideological and not technical: The unfettered markets ideology with its built-in refusal of regulation, or government is not the solution to any problems but the cause of all.

You can also call it collateral damage of Anglo economic dynamism and creativity.

Finally Art, Sarko sounds more Colbertist than neo-liberal to me.

This should not exonerate Europe from its own failing and Steinmaier, Juncker and Sarko would have been well advised to shut up. Just to remind us of a famous sentence from our previous Roi fénéant.