Paul Jorion at Zermatt Summit 2011 LIVE talks on Financial Markets to Serve the World Economy
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0:01 - 0:02Zermatt Summit
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0:02 - 0:04Changing hearts and minds
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0:04 - 0:06Humanizing Globalisation
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0:08 - 0:11Now Paul Jorion will come up and speak.
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0:11 - 0:16Paul is by initial training a social anthropologist,
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0:16 - 0:20but he moved from social anthropology to finance.
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0:20 - 0:23and he tells me that there was no great transition,
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0:23 - 0:25because at the time he made the transition
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0:25 - 0:29he was working on artificial intelligence.
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0:29 - 0:33So perhaps we will have a bit of natural intelligence,
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0:33 - 0:35as well as artificial intelligence,
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0:35 - 0:37as we got through your presentation.
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0:37 - 0:40May I ask you please to welcome Paul Jorion
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0:40 - 0:44[applause]
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0:45 - 0:50I was blessed by the most inspirational introduction.
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0:50 - 0:53Preparing my little presentation,
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0:53 - 0:56I though Let's try to make something good.
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0:56 - 1:01But after having watched Malika, and listened to Elisabeth,
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1:01 - 1:03what crosses my mind is:
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1:03 - 1:06Let's try and make it even better.
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1:07 - 1:13I worked from 1999 to 2002 for a company called Indymac.
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1:13 - 1:17Indymac had a specialty of homeloans, as we call them,
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1:17 - 1:23and it's more usually called mortgages.
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1:23 - 1:25Indymac had 2 specialties:
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1:25 - 1:29Reverse Mortgages where the person who has the mortgage
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1:29 - 1:31is the owner of the house
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1:31 - 1:36and little by little, the house goes back to the bank.
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1:36 - 1:41The other one was called Alt A (Alternative A).
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1:41 - 1:45I won't be going into any details,
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1:45 - 1:49but Alt A is just one notch above Subprime.
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1:49 - 1:54Indymac was the third major bank run
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1:54 - 1:56in the history of American finance.
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1:56 - 1:59A bank run is when people start lining up in the streets
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1:59 - 2:03asking for their money to be returned to them.
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2:03 - 2:07That happened all in July 2008, on a Thursday.
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2:07 - 2:11Things got worse on the Friday.
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2:11 - 2:15On the Monday, the bank re-opened.
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2:15 - 2:18It was previously called Indymac bank,
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2:18 - 2:22and on the main entrance,
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2:22 - 2:25there was a banner now between the two words,
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2:25 - 2:28It was Indymac Federal Bank.
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2:28 - 2:32The FDIC had taken over the bank in the name of the American government,
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2:32 - 2:37and it was from now belonging to the American government.
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2:38 - 2:42From 2002 to 2004, I worked for Wells Fargo.
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2:42 - 2:45Wells Fargo is a well-known bank in San Francisco.
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2:45 - 2:47And it's doing well,
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2:47 - 2:50fortunately for its business, it's doing very well.
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2:50 - 2:54I was working in what was called "Consumer Credit".
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2:54 - 2:57And what was Consumer Credit was doing was essentially...
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2:57 - 3:01[A microphone issue needs to be fixed.]
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3:02 - 3:04- Just give me a second.
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3:05 - 3:06Try it on.
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3:09 - 3:10- Louder?
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3:10 - 3:13Alright ok.
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3:15 - 3:20In 2002, I moved working for Wells Fargo,
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3:20 - 3:23which as I said is still a major bank.
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3:23 - 3:27I was working in a division which is called 'Consumer Credit'.
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3:27 - 3:29and our specialty was called HELOC.
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3:29 - 3:34HELOC stands for Home Equity Line Of Credit.
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3:34 - 3:37And essentially, on home, if you're not familiar with that,
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3:37 - 3:39it's a second lean as we called it,
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3:39 - 3:42a second mortgage that you can get on a house.
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3:42 - 3:45The difficulty with the second mortgage is that
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3:45 - 3:47the first one comes first,
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3:47 - 3:48that's why it's called the first lean.
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3:48 - 3:52So when things turned sorer, in 2008,
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3:52 - 3:57what happened is that HELOC had no value whatever.
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3:57 - 4:03People hired up on HELOC as I was had lost rapidely their jobs.
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4:04 - 4:09From 2005 to 2007, I worked for CountryWide.
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4:09 - 4:13CountryWide as you know is the major corporate
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4:13 - 4:16in the disaster of the subprime industry.
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4:16 - 4:23A number of companies did worse and they fell earlier than did CountryWide,
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4:23 - 4:25but CountryWide is the main corporate.
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4:26 - 4:30In 2008 it was taken over by Bank of America.
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4:31 - 4:35So these 3 experiences made me think about finance.
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4:35 - 4:40I imagine that you think that justifies to have come to some thoughts.
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4:40 - 4:46It was not just on my own. We had conversations at lunchtime, between colleagues.
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4:46 - 4:50And we though: We are running into some major disaster
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4:50 - 4:51but what can we do?
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4:51 - 4:53M. Greenspan, who was, as you know,
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4:53 - 4:56Head of the Federal Reserve (the central bank of US)
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4:56 - 5:01for nearly 20 years from 1986 to 2006,
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5:01 - 5:02said at that time:
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5:02 - 5:08"The head of these companies did not think of their self interest, and did not work towards it."
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5:08 - 5:13assuming that if the head of these companies had worked for their self interest,
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5:13 - 5:18that would have produced "auto-regulation"
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5:18 - 5:21meaning that the system would go bad
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5:21 - 5:24and then would recover on its own.
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5:24 - 5:27And as you know from what you have seen in the news
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5:27 - 5:30there's been a lot of discussions lately in 2010 and 2011
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5:30 - 5:33about what some companies,
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5:33 - 5:39and particularly highlighed in that respect Goldman Sachs and Deutsche Bank,
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5:39 - 5:44that when it came to saving the whole mortgage industry
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5:44 - 5:47or try to save their own bank,
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5:47 - 5:49these companies chose to save their own bank
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5:49 - 5:53even at the detriment of the whole industry.
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5:53 - 5:56So what I started thinking at that time,
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5:56 - 5:59and as I said, in discussions with colleagues,
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5:59 - 6:03what can we do to prevent from within finance
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6:03 - 6:07that such a disaster happens again.
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6:07 - 6:11And I started thinking about different ideas.
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6:11 - 6:16In September 2008, which is just literally
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6:16 - 6:20one month before I got dismissed by CountryWide,
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6:20 - 6:25I was part of the first load, the first batch of people that were let go.
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6:25 - 6:30At that point I think about 30% of the people in the company were let go.
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6:30 - 6:36And maybe 4 or 5 months later, the company was simply taken over by Bank of America.
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6:36 - 6:39And I though at that time:
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6:39 - 6:42What should we do?
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6:42 - 6:47And one month before I was let go, I wrote a piece,
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6:47 - 6:50an opinion piece for the French daily "Le Monde".
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6:50 - 6:54I called that piece "A Constitution for the Economy".
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6:54 - 7:00My idea was that we needed to find an exit out of the situation.
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7:00 - 7:03Let say at the highest possible level.
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7:03 - 7:05Let me here pause a little
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7:05 - 7:09to tell you exactly what I started thinking about.
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7:11 - 7:13A long time ago,
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7:13 - 7:17a person who is historical,
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7:17 - 7:21or maybe he's not... but anyway, the stories are beautiful,
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7:21 - 7:24a person called Moses came down from the Mount,
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7:24 - 7:28and he was holding the Tables of the Law.
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7:28 - 7:34And I'll just take one of the 10 commandments of these Tables of the Law:
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7:34 - 7:35“Thou shalt not kill"
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7:36 - 7:37To hook up what I'm saying
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7:37 - 7:40with some earlier discussions today,
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7:40 - 7:43there was an alternative here:
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7:43 - 7:49The first alternative was to wait patiently for people to reform themselves,
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7:49 - 7:53unless there was no danger anymore that anybody would ever be tempted
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7:53 - 7:58to murder his neighbour or part of his family or whatever...
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7:58 - 8:03Or, there was the alternative of maybe having a prohibition about it.
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8:03 - 8:06Personally I think that the idea of Moses,
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8:06 - 8:09or God if he was directly inspired by God,
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8:09 - 8:11I think it was a great idea.
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8:11 - 8:14I think we really saved a lot of time.
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8:14 - 8:17A little other historical anecdote,
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8:17 - 8:21during the French revolution in 1792,
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8:21 - 8:23a person called Saint-Just,
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8:23 - 8:26one historical figure in the French revolution,
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8:26 - 8:29came up with the idea at some point.
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8:29 - 8:33In 1792, it was the worse of the French revolution,
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8:33 - 8:36there was a civil war in France, nearly everywhere,
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8:36 - 8:38in Nantes, in Lyon.
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8:38 - 8:43There were external wars on all the borders of the country.
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8:43 - 8:47And Saint-Just had prepared a speech, where he said:
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8:47 - 8:50"What we need to do is to reform the individuals
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8:50 - 8:55(which was essentially the line that had been taken by the French revolution until then),
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8:55 - 9:00but at the same time, we have to do that in parallel with changing the institutions".
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9:00 - 9:01He started speaking.
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9:01 - 9:03He was booed.
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9:03 - 9:06It was the end of Robespierre, who was his friend,
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9:06 - 9:08it was finished: he never read this particular piece.
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9:08 - 9:10He was arrested on the following day,
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9:10 - 9:13and he was decapitated a couple of days later.
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9:13 - 9:16The idea was essential but it came pretty late.
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9:16 - 9:19So what I was thinking was the following:
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9:19 - 9:22Finance is extremely useful.
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9:22 - 9:26It provides the bloodstream of the economy.
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9:26 - 9:29It has 2 functions which are essential:
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9:29 - 9:33one that we call 'Price Discovery' which is essentially
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9:33 - 9:39finding people who need money in order to start a business, do something,
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9:39 - 9:43or even sometimes just to consume, and bring these people together
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9:43 - 9:49with other people who have some capital they can dispense of for a period of time,
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9:49 - 9:51make these people meet,
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9:51 - 9:53make it possible to work that way.
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9:53 - 9:59Another function which is essential for finance is the insurance principle.
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9:59 - 10:04A large institution like a bank can actually dump
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10:04 - 10:07the individual shocks of some little drama
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10:07 - 10:09happening here and there,
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10:09 - 10:11and paying a premium,
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10:11 - 10:15you can actually spread that risk over the whole system.
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10:15 - 10:16These are essential.
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10:16 - 10:20But there are other parts in finance that went really wrong.
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10:20 - 10:24So what I was thinking is not like some people say:
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10:24 - 10:26"Let's close all stock exchanges."
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10:26 - 10:33or "Let's eliminate all derivatives." (which are particularly useful financial instruments).
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10:33 - 10:38or "Let's tax every possible financial transaction".
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10:38 - 10:40I was thinking of something more specific.
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10:40 - 10:43Let's find a way to carve out very delicately,
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10:43 - 10:46Let's carve out exactly the part which is
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10:46 - 10:49useless and dangerous
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10:49 - 10:52and remove that part from the rest.
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10:52 - 10:54What makes this part in finance dangerous?
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10:54 - 10:57One is what we call systemic risk.
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10:57 - 11:02Systemic risk is the fragility of the whole system.
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11:02 - 11:06Making the contagion effects multiplied
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11:06 - 11:12and not enhanced by the whole way the system works.
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11:12 - 11:16The other danger is the following
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11:16 - 11:19and here I'll give you an example.
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11:19 - 11:25This example will explain exactly what I've got in mind.
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11:25 - 11:30In 2008 in the first half of the year,
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11:30 - 11:32at the very beginning of the period,
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11:32 - 11:38the price of a barrel of oil was $45.
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11:38 - 11:44On the 1st of July, it hit during one particular day, $147.
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11:44 - 11:47That was more than treble the price.
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11:47 - 11:50There was a major crisis.
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11:50 - 11:53Nobody much in American Government bothered except one party.
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11:53 - 11:57And that party asked for an investigation to be started.
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11:57 - 11:59That party, and it's a bit surprising if I tell you,
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11:59 - 12:02it was the Pentagone. Why was it the Pentagone?
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12:02 - 12:04Because the Pentagone had to make reserves of fuel
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12:04 - 12:07for the boats, for the planes, etc.
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12:07 - 12:11and the Pentagone wanted to find out what happened.
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12:11 - 12:13Investigation found out who were the corporates.
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12:13 - 12:17The corporates were not dark people in dark clothes...
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12:17 - 12:19They were pension funds.
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12:19 - 12:22They were deans from universities.
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12:22 - 12:24They were hospitals.
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12:24 - 12:25They were museums.
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12:25 - 12:30Why did they go into that business of going into the market
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12:30 - 12:33and making all these price being lifted?
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12:33 - 12:35Because they feared for the dollar.
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12:35 - 12:36They had some assets,
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12:36 - 12:40they feared that the value of these assets would depreciate.
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12:40 - 12:43So they moved in massively into the markets.
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12:43 - 12:47And the instruments which helped them doing that were of a special nature.
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12:47 - 12:48They are called baskets.
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12:48 - 12:49Baskets why?
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12:49 - 12:52Because it's not only oil you find
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12:52 - 12:55that you can buy in that particular perspective.
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12:55 - 12:57They make baskets, meaning that they add:
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12:57 - 12:59metals, like copper,
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12:59 - 13:00there's some food,
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13:00 - 13:04there are cereals like wheat,
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13:04 - 13:05there's coco,
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13:05 - 13:06there's coffee,
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13:06 - 13:07there's cotton,
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13:07 - 13:10whatever you want to think of.
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13:10 - 13:12And when the price of oil was lifted,
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13:12 - 13:16the price of all these commodities was going up simultaneously.
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13:16 - 13:19Why? Because people would buy these baskets.
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13:19 - 13:21What did it lead to in summer 2008?
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13:21 - 13:25That lead to some anger driven riots
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13:25 - 13:28in some countries in the world:
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13:28 - 13:33in Indonesia, in Haiti, in some parts of Africa, and so on.
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13:35 - 13:39When the Senate Commitee hold these people to explain what was going on,
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13:39 - 13:41they moved out of these markets. Why?
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13:41 - 13:42Because of the stigma.
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13:42 - 13:44They didn't want to be in the limelight.
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13:44 - 13:48They didn't want to be called there to testify about what was going on.
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13:48 - 13:50They all moved out. What happened?
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13:50 - 13:53All the prices dropped suddenly.
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13:53 - 13:56They dropped so low,
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13:56 - 14:01that in the process, the producers in Africa, of coco,
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14:01 - 14:03the producers of coffee all over the world, etc.
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14:03 - 14:06were hit by that. Why?
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14:06 - 14:09Because the prices at that point were going too low.
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14:09 - 14:11So what does that mean?
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14:11 - 14:14It means that prices going up were killing the consumers
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14:14 - 14:17because you and I at the filling station who were paying
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14:17 - 14:19for the price of the fuel going up.
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14:19 - 14:24When it comes down, it's the producers who are being hit
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14:24 - 14:26by the process of going down.
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14:26 - 14:29There was something even more I would say tragic
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14:29 - 14:31in terms of what we are concerned with today
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14:31 - 14:33in the process of coming down.
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14:33 - 14:37When the prices of oil comes up, it's interesting financially
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14:37 - 14:41to have startups on renewal energy.
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14:41 - 14:45The price of oil goes up, and it becomes more interesting
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14:45 - 14:48to go into research to see how to replace oil.
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14:48 - 14:53When the price of oil drops suddenly back to the level of $45 from $147,
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14:53 - 14:57a lot of these startups who were working on renewal energy were eliminated.
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14:57 - 15:02I hope you understand what I've got in mind when I'm talking about this.
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15:02 - 15:07What I though about what would be one of the essential, major, central principle
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15:07 - 15:10of the idea of a Constitution of Economy.
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15:10 - 15:11When I say Constitution of Economy,
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15:11 - 15:15I mean indeed something that applies to the world as a whole.
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15:15 - 15:18I think that's where we need to go.
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15:18 - 15:19You can call it Tables of the Law,
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15:19 - 15:22and you can think of adding an eleventh commandment
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15:22 - 15:24or maybe a twelfth and so on...
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15:24 - 15:27What I thought is one thing you need to do is to
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15:28 - 15:34prohibit these wagers on the evolution of price.
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15:34 - 15:36It is one part of finance,
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15:36 - 15:40it is a very essential part of finance nowadays.
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15:40 - 15:53In 2007, 47% of the GDP in the US was constituted of financial operations.
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15:53 - 16:00Out of these financial operations, on the commodities markets, the proportion varies:
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16:00 - 16:05it varies between 80% and 90% of the activity on these commodities markets
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16:05 - 16:11currently being done in the perspective of these wagers about fluctuations of prices,
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16:11 - 16:15which is one aspect of what we call speculation.
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16:15 - 16:21So what I was thinking is the part to carve out from finance
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16:21 - 16:25to go back to a financial market which serves the economy,
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16:25 - 16:29The part to carve is that part which is useless, dangerous,
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16:29 - 16:33which takes a lot of money out of the economy.
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16:33 - 16:34Just one remark:
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16:34 - 16:37some people criticize this idea I've been expressing,
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16:37 - 16:40saying "If you do what you say,
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16:40 - 16:44too much money will go back into the economy, maybe leading to inflation."
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16:44 - 16:48I think that it's a risk we can take.
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16:48 - 16:50The objection to what I propose as that
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16:50 - 16:55prohibition of bets, wagers on the evolution of prices,
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16:55 - 16:59the main objection is saying "it's impossible to implement,
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16:59 - 17:03it's too complicated, not everybody will agree to do it at the same time."
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17:03 - 17:07The main response is the following:
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17:08 - 17:18FASB 133 (Financial Accounting Standards Board of the United Nations, rule 133)
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17:18 - 17:23is doing that curving out that I'm telling you about right now.
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17:23 - 17:25It is there in that particular text.
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17:25 - 17:26What's the purpose there?
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17:26 - 17:30To make a difference between people that are useful to the economy
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17:30 - 17:31and people that are detrimental.
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17:31 - 17:33What is the purpose of the rule?
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17:33 - 17:35To make a difference in taxation.
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17:35 - 17:38People who are doing those parts
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17:38 - 17:40(that I suggest to be removed all together)
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17:40 - 17:42are taxed more.
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17:42 - 17:46When I'm being told it's impossible just to define what needs to be done,
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17:46 - 17:50it's already there, it's already in FASB133.
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17:50 - 17:53And something more:
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17:53 - 17:56A prohibition of wagers on the evolution of prices
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17:56 - 18:02was part of the law of the majority of countries in the world in the 19th century.
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18:02 - 18:04It was removed.
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18:04 - 18:08The article in Penal Law in France is article 421.
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18:08 - 18:10And it says exactly what I'm saying.
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18:10 - 18:16It's forbidden to make wagers on the evolution of prices.
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18:16 - 18:18It's been removed in 1885.
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18:18 - 18:23I've been going into the History of this evolution.
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18:23 - 18:25It's always the same explanation.
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18:25 - 18:30Under the pressure of the business community, these rules were removed.
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18:30 - 18:34And at some point when some countries started removing it,
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18:34 - 18:38business communities in the other countries said:
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18:38 - 18:41"we have a disadvantage now, we can't do this anymore."
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18:42 - 18:44I'll close on that.
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18:44 - 18:47I think it's not only possible,
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18:47 - 18:49it's already in the text in some way.
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18:49 - 18:50Some articles in the Law were there,
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18:50 - 18:53they have been removed, they can be reinstituted.
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18:53 - 18:55What I'm suggesting, what we need to do,
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18:55 - 18:58and that doesn't mean that we shouldn't reform individuals.
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18:58 - 19:00It needs to go together.
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19:00 - 19:03What I'm suggesting is only possible
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19:03 - 19:06if a large number of individuals reform themselves enough
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19:06 - 19:10in order to say we need to take a measure like that.
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19:10 - 19:11What I'm suggesting is:
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19:11 - 19:16"Thou shalt not wager on the evolution of prices."
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19:16 - 5999:59Thank you.
- Title:
- Paul Jorion at Zermatt Summit 2011 LIVE talks on Financial Markets to Serve the World Economy
- Description:
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Paul Jorion gives a keynote address on Financial Markets to Serve the Economy at the Zermatt Summit 2011. Servant Laeaders : theme of the day - Out of the Crisis with a New Vision
The recent systemic crisis experienced by world major economies has evidenced the short comings of the current market practices. Generating as much poverty as growth and as much hidden risks as profitability, these practices have the additional effect of dramatically limiting the options left for sustainable development. Leaders have to innovate in defining new operating modes and create a new paradigm which would be both respectful of the human person and of our planet Earth while complying with the technical conditions for efficiency. This requires altogether a new vision of the place of the human person in the globalization process. - Video Language:
- English
- Duration:
- 19:20