[OPE] Trichet on risk

Hi Alejandro,

I studied philosophy of science in New Zealand with Dugald Murdoch http://www.philosophy.su.se/eng/murdoch.htm and he convinced me that scientific statements are not necessarily falsifiable statements, but always fallible statements, usually with specifiable limits of application. If statements are faillble, this implies that at least in principle it is possible to test them, even if we don't know how to do that yet.

A scientist says, "I believe this on the strength of the logical and empirical evidence I have, but I could be wrong and I could be proved wrong". It is just that he thinks pragmatically, "I cannot wait forever and a day until I am proved wrong, I will use the positive knowledge that I have, because that is all I have, and that's what I have to work with".

Methodological falsificationism presumes that scientists propose bold theories in order to falsify them. But as Imre Lakatos showed, scientists do not in reality do that - they aim to confirm hypotheses, for the purpose of obtaining useful and usable knowledge. Popper says "best to live with as few illusions as possible" but the domain of illusions is endless.

Popper's theory is essentially a theory about girlies, in my opinion. The rational kernel is only that a tiny hypothesis usually doesn't advance science very much, and that for all intents and purposes, some experiments are indeed crucial experiments. But in a true scientific sense, crucial experiments rarely exist, since we may simply not know what to attribute their success or failure to. The explanation we have may not be the true explanation, it is just that we believe it, because it seems to work for now.

When Mr Trichet is talking about his "unit of risk" he is talking gobbledygook, and when he talks about "undervalued risk" all he is saying that (1) some risks were ignored (2) some risks were inadequately expensed by people willing to insure themselves against those risks or insuring against them. This risk ideology is just a very clever way that Mr Trichet has for fudging who is responsible for what, and all I am saying is, that this is DISHONEST.

Now as long as you fudge who is responsible for what, YOU WILL NEVER GET A HEALTHY FINANCIAL SYSTEM. Get it? You might as well go into confessional with the Pope about your guilty sins, and pray to God he will help. But God helps him who helps himself, and you don't help yourself by talking bullshit.

The problem with social science is not lack of falsifiability. The problem with social science is that (1) it is not done, because people think that their ideological common sense will do, or (2) that theories are not disciplined properly with the facts of experience, or (3) that the formulation of social scientific problems is totally obscure and ideological, having nothing to do with the real problems in hand. Some of Marx's theorems have been proved true, others false, and for other we do not know yet. That is how it is.

In the neoliberal era, two things happened: social science departments were for political reasons closed down, or reduced to studying safe, obscure subjects; and, social science became a postmodernist soup, skeptical of the ability to know anything objectively beyond the size of a penis. In that case social science reduces to clever storytelling where you try to show how terribly perceptive you are about how other people see things and understand things, with all sorts of cleverly contrived metaphors.

Well, they can do that, but it doesn't mean that social science doesn't exist. Somebody can say to me, "do you play football", and I say "no I don't play football", but that doesn't mean football does not exist, nor does it mean that I cannot play football, if I want to play football. Some drongo can then dream up an "ontology of football", but that is neither here nor there.

You argued:

"If the capital reserve that any serious bank system in the world prescribes is not a pragmatic approach to this specification [of the aggegrate credit volume which is sustainable longterm], you tell me what it is."

That just shows you how little you know about banking, and about the extension of credit.

You ask:

"So, nobody can specify this aggegrate credit volume, but the system does it mysteriously without any conscious decision. Is this the argument of the invisible hand?"

But that is not what I have argued at all. I have argued that they keep extending more credit, not knowing what the limit is, until there are severe defaults - the only limits there are, are "perceptions" of creditworthiness but even those are not entirely controllable - for example, if consumers refuse to buy for no good reason at all. If you have a lot of capital and you cannot invest yourself, then you will lend it, otherwise you don't make any money on it at all, that's clear. The millionaires and billionaires had all this money, but they couldn't possibly invest all that themselves. There were subprime defaults all along, as Mr Bernanke himself pointed out, it is just that at a certain point they started to rise gigantically, and that is what broke the banks. But if it had not been the subprimes, it would have been something else. That is what I am arguing. The proof of that is, that there are now all sorts of dodgy credit arrangements coming to light, all over the show.

The problem with the swaps is not the total amount of capital involved. It is that many swaps dealers found that they cannot make good on their contracts. But if they cannot make good on their contracts, that doesn't necessarily mean that all the capital insured is lost. You might just lose some of it, not all of it, it is just that the insurance doesn't pay out for the difference, if the dealer cannot do it. It is just that nobody really knows exactly how big the losses will be, among other things because you don't know who is involved, and you don't really know what the contracts are about. You can only have a rough estimate within the realm of logical possibility, based on what you know about dealers and so on, customary market behaviour etc. Supposing the dealer defaults on the contract. The obligation to pay still stands, it's just that nobody knows how much will be paid in what time, or if it will be paid some time. This gets us back to what we were talking about before, namely the aggregate volume of credit which is sustainable. One of the implications of these financial instruments is that you simply do not know exactly what volume of credit is involved, and how it fluctuates. At best you can guesstimate it. And you can say, "if push comes to shove", we've got $7 trillion dollars we can use.

Sure, you can estimate a few things, from aggregates of government credit, business credit, bank credit, consumer credit, and so on, and you can compare that to the level of economic activity measured by output, employment and investment. But you cannot really tell from that what total credit volume is sustainable longterm, at most you can say, this is what we got away with, so far. When 9/11 happened, Wall Street went into a panic. What if you have a fullscale war on your hands, or somebody wipes out a whole city, or there's an epidemic?

The bankers just play poker: they say, well if you want an economy with currency that is worthless, so that the economy comes crashing down, go ahead. And most people don't want that, so they will nicely do what they're told. Naturally, from such scare tactics, the astute businessman can make an awful lot of money.

Cheers

Jurriaan

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Received on Thu Nov 27 17:34:55 2008