Springtime bursts upon Paris, teeming masses of flowers blooming in a riot of color, revolutionizing the cityscape. Parisians emerge from their winter doldrums, and the cafés come to life again. Today, Paris entices its visitors with a magnificently warm and sunny, 75-degree day.
What a day to be stuck indoors at a conference, discussing systemic risk in the financial world! But the research papers presented were inspiring and provocative. A link to the conference website follows; we encourage our readers to delve into the papers, as they are beyond the scope of a brief commentary: http://risk2012.institutlouisbachelier.org/. Participants from around the globe contributed serious work in an attempt to describe the lessons of the financial crisis learned to date. They attempted to model, forecast, and introduce fresh concepts in order to assess what lies ahead.
Forecasting is an uncertain art form at its best. Quantitative work may assist, but it depends on retrospectives in its calculus. One particular researcher delved into liquidity theories and instruction from the yield curves of the past. I discussed his data points with him, how he achieved his equations and how he wanted to tie these measures together. He was young, skilled, intense, and very enthusiastic. His work awakened new energy and enthusiasm in this older practitioner. I asked him, “At what point did you stop using the yield curves? What was your last data point?” He replied, “I ran the models through 2010.” I responded, “Did you consider that Operation Twist, on the part of the Federal Reserve, is a recent experience? Your models do not capture a three-year, longer-term financing mechanism of the European Central Bank. How could such models deal with the future when we are in such an extraordinary and unusual place in the history of monetary economics?” He stared back at me and admitted, “You have asked the question with which we all struggle.”
My takeaway, after twenty research papers and speeches from world-renowned experts, remains the same as previously shared in these commentaries: We do not know how this process will end. We have never been in a place where the major central banks of the world have tripled the sizes of their balance sheets and have driven the short-term interest rate near zero. We are in uncharted waters. We do not know where the rocks and shoals lie.
The risk discussions at this marvelous meeting were a terrific preamble to the coming Global Interdependence Center sessions that will take place on Monday and Tuesday. There, speakers will examine issues involving monetary policy during these unusual times demanding unorthodox responses. We look forward to the research papers presented at the initiation of the GIC’s Global Society of Fellows. We will have a number of distinguished speakers, and we will have the opportunity to hear from current and former central bankers. We will then engage in private round-table discussions on Tuesday.
The outcomes of the conference are yet to be determined, but the remarkable character of the times we are living through is becoming ever more evident to this writer. When monetary policy blends with fiscal policy in amounts measured in the trillions, we must rethink the entire systems within which we operate. We have to set aside the historical texts. We must draw back to the roots of our disciplines. The challenge is immense, and we are working at it diligently. We wake up and work with enthusiasm in this radically new environment.
The conference this week was held at the Hôtel Potocki in le 8e arrondissement de Paris. Built in 1884, it stands as a magnificent example of the neo-Louis XIV style that epitomizes the City of Lights. With its interior gardens, ornate decorations, and overwhelming historical presence, it eludes capture in mere words. Those interested may follow this link for a short virtual tour: http://dai.ly/9B8QUQ.
As we entered the meeting hall on the second floor, we were handed a book entitled Risk and Meaning: Adversaries in Art, Science and Philosophy, by Nicolas Bouleau. We paged through, perusing the writer’s discussion of art, philosophy, economics, and predicting the future. As he ranged from Cicero through to modern times, we pondered the nature of the attempt to discuss the future. The only thing we can be certain of in regards to the future is its uncertainty. And yet the attempt to guess at what the future holds is an absolutely essential aspect of human nature. In the book’s opening discussion, Nicolas Bouleau lays out an argument that is epistemological. Epistemology is the science (or art form) of determining how you know what you know. Epistemological thinking is fundamental, and this writer has struggled with it all of his adult life.
Here we are, enjoying a beautiful spring day in Paris, presented with a new book that incorporates thinking about epistemology and finance and economics and other deliciously philosophical, and yet intensely pragmatic, questions. What a wonderful day. What a wonderful way to greet the spring.