Monday, December 15, 2008

Momsueir Trichet does NOT repent

It is disingenuous of Monsieur Jean-Claude Trichet to continue to argue, as he first did at the WEF in Davos 2007, and as he did the other day in an interview to Financial Times, that the issue is mis-pricing of risk. Indeed, he hinted that the mispricing of risk may be over.

My response is the following: we can price risk correctly for 99.9% of the time. The difficulty is knowing when the 0.01% is upon us.

And the most important thing to remember about that 0.01% is that while the consequences of the 99.9% are manageable, the consequences of the 0.01% are more or less UNmanageable (as we are finding out since the Summer of 2007).

The problem is that it is impossibly costly to ensure against the 0.01% whose timing, scale and consequences cannot be determined. Monsieur Trichet argues that the solution is to keep to rules - in Europe, where we have rules; and, in the rest of the world, where we do not have sensible rules, to create a co-ordinated set of rules.

This may be fine in theory. But the difficulty is to agree a set of rules that suit everyone (clearly they will "suit" some people less than others), and then to agree a mechanism that implements the rules with global reach and impartiality but maintains human freedoms.

Monsier Trichet also acknowledged that many of the "dampeners" in the system have disappeared - by which he means mechanisms that acted as a brake on the booms and busts created by the kind of financial and economic system we have around the world at present.

He seems to think that anti-cyclical provisioning for banks (such as has been practiced in Spain - with some success in averting the impact of the crisis so far) may be adequate, when complemented by anti-cyclical provisioning and tax policies at country and global level.

Anti-cyclical provisioning is elementary good housekeeping. That is what the whole notion of reserves is about - and has been since the time of the Jewish forefather Joseph in Egypt (see the story in first book of the Bible, "Genesis", chapter 41).

But the notion of reserves, highly sensible as it is, is independent of the kind of economic system one has.

I invite Monsieur Trichet to come to the conclusion that, while we do need global rules, these have no chance of succeeding without the inclusion of complementary currencies which act as what I might call "natural system dampeners" for what everyone now acknowledges are the pro-cyclical effects of the current system.

The key issue is whether it is possible to have a stable global system rather than a cyclical global system.

The answer, I have argued against the overwheming consensus, is "YES!". The key lies in working at two levels:

(a) moving our culture away from greed and fear, towards contentment and hope - which is an educational, political, psychological and ultimately spiritual matter; and

(b) moving our economy away from being overwhelmingly debt-based towards becoming overwhelmingly investment-based.

Though tax and regulation can mitigat the effects somewhat, as long as the global economy is debt-based it will certainly be cyclical.

But there is no reason to have a cyclical debt-based global economy (well, actually, there is one reason, and only one reason - human greed and fear - which is what has condemned most of the world through most of history to high growth followed by collapse).

While the world was not so interconnected, the growth and collapse happened at the level of kingdoms and nations. In an interconnected world now, the growth and collapse happens on an increasingly global basis.

So the world has only two other choices: go back to much less globalisation (which will result in either in regional wars of varying intensity, or in another world war), or go on with incrasing globalisation - but on the basis of increased regulation of a debt-based system.

The third alternative (which I promote - that of rejecting a debt-based global system for an investment-based global system) is much the most free and human of all.

We were already told about this in the Bible, in the Koran, and so on.

Some old wives tales are merely tales. But some tales have have truth to them.

Rejecting truth is simply arrogant. And, sooner or later, arrogance leads to disaster Sphere: Related Content

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