Saturday, September 5, 2009

Sarko's Coup de Comm'

Hat tip to MYOS for this one:

Sirinelli on the Right

Historian Jean-François Sirinelli considers the achievement of the UMP in establishing itself as a unified party of the Right. He is inclined to give much of the credit to Nicolas Sarkozy. He makes a persuasive case, although I would place much greater stress than he does on changes in the ideological climate. The demise of communism, the decline of Marxism as an intellectual force, the rise of neoliberalism and its attendant shifts in conservative understandings of the role of the state in managing the economy--all are important factors. Sirinelli's discussion raises the interesting question of why the Right has been able to achieve unity while the Left has not. I would stress sociocultural factors: the Left must bridge the gap between a culture of management and a culture of confrontation, whereas the Right is built upon a culture of order to which even its working-class elements subscribe. Insecurity and immigration--the most potent of the perceived threats to order--are therefore important factors in establishing right-wing solidarity.

Climate and Wine

Another FT piece catches the eye this morning: the French wine industry is threatened, many wine growers feel, by climate change. France's culture de la vigne is as much an accident of geography as a product of history. For millennia the French climate has been perfect to support a variety of grapes. We have heard for years about the threats to the industry from globalization, but now the globalization menace has a new dimension: other regions may benefit from climate change as France suffers. This year's unprecedented heat wave is taken as a case in point: it has been hard on the vine growers. Such heat waves are expected to become more frequent as the planet warms.

So, in compensation for the carbon tax, how about a tax rebate on wine consumption?

France Drags Its Heels

The Financial Times sees a rift opening in the G20 between the US and the UK on the one hand and France on the other. The issue is how to regulate the financial system to prevent a repeat of the crisis of 2008-9. To simplify, France favors regulating individual incentives by limiting bonuses to traders and bankers. The US and UK want to shore up bank capital positions by requiring higher reserves and lower leverage ratios.

There is a problem with the US-UK position: it tends to be procyclical. In a downturn, bank assets diminish in value, and with stringent capital regulations in place they are more likely to be forced to sell to raise capital, thus further decreasing asset prices and making everyone in the system worse office. Yet there is no doubt that before the current crisis, capital reserves were too low, so that even a modest fall in housing prices raised doubts about bank solvency. So there is ample reason for the US and UK to take the stance they do.

By contrast, France, in the person of Christine Lagarde, is arguing that the Basel II regulatory framework, agreed to by banks after 20 years of negotiation, should suffice. Basel II relies less on capital requirements and more on so-called Value at Risk (VaR) models to set limits on bank borrowing. The problem with Lagarde's position is that the VaR models in widespread use did not perform well in the crisis. These models, which rely in essential ways on the banks' own representations of the risks involved in their financial instruments, depend heavily on statistical analysis of historical performance data. The banks hit hard by the crisis were already using VaR models for their internal risk management, and these models predicted that they had nothing to worry about. In a widely quoted statement, one Goldman Sachs risk manager said that market movements at one particularly bad stage of the crisis were "5 standard deviations beyond what the model predicted" for several days running. Hence there was something wrong with the model.

Obviously improvements will be made in light of post-crisis data, but still it seems imprudent to rely, as Lagarde seems to want to do, on such modeling alone. Capital requirements are conservative, old-fashioned, potentially pro-cyclical, and increase the cost of capital, but perhaps one needs to cling to them until the VaR concepts at the heart of Basel II have been more thoroughly tested.

See also Nicolas Véron, here.

UPDATE: Looks like the US-UK version prevailed.