Once More, Understanding Systemic Financial Risk

William Leiss:  RiskBlog 1 March 2012

Once More, discount Understanding Systemic Financial Risk

Satyajit Das and Systemic Risk [PDF]


Andrew Palmer’s recent essay on financial innovation in The Economist, “Playing with fire” [25.02.12: http://www.economist.com/node/21547999] has received a lot of attention.  Read it, but also read the trenchant critique by Satyajit Das, one of the most perceptive observers on the subject.  (Read his frequent blogs; his books, listed below, tend to be rather long-winded and egoistic, a compilation of scattered thoughts.)

The global financial crisis which began in 2008 is a slow-moving massive train wreck that may take an entire decade to bring under control.  The catastrophic events of 2008 – still reverberating today, more than three years later, in the European sovereign debt crisis – have caused losses of many trillions of dollars.  The scope of the losses is almost uncountable [http://bettermarkets.com/blogs/financial-reform-will-keep-wall-streets-hands-out-taxpayer-pockets, from “Better Markets,” a website I recommend].  This is why it is the best illustration of what I have called a “black hole of risk” in my book, The Doom Loop in the Financial Sector [www.blackholesofrisk.ca/].

Regulatory reform of the financial sector is designed to help us avoid a repeat of these events.  But the struggle for regulatory reform is far from won, because of intensive lobbying by big banks and financial sector interests.  The current battle is over the so-called “Volcker rule,” designed to reduce risks from investment banks trading on their own accounts:  to understand this one, and others like it, follow “Baseline Scenario,” written by Simon Johnson and James Kwak [http://baselinescenario.com/].  If the bankers win this one, and others, they’ll do it again to the rest of us:  Take obscene amounts of money for themselves during the good times, and saddle the taxpayers with the costs of bailouts when they bring on the bad times again.

Part of the reason for this extended train wreck is that at least one solution adopted by governments to respond to it is itself the cause of future problems.  I refer to the central banks’ policy of mandating near-zero interests rates over long terms.  It is already clear that this policy solution is devastating the financial health of insurance companies and pension plans, failing to rewards savers, and encouraging imprudent borrowing.  Even the Bank of Canada, which joins other central banks in this flawed policy, acknowledges its downside risks, calling attention in its December 2011 review report to “a prolonged period of low interest rates, which may encourage imprudent risk-taking and/or erode the long-term soundness of some financial institutions” (preface, page 1), available at: [http://www.bankofcanada.ca/wp-content/uploads/2011/12/fsr_1211.pdf]  Of course, it uses the typical wishy-washy bureaucratic language of “may” encourage or erode, which is irresponsible:  The serious damage being done to the insurance industry and pension funds from the extremely low interest-rate policy of central banks has already been widely reported, and it poses a serious risk to the security of the future retirement plans of millions of Canadians.

In his recent blog, below, Satyajit Das explains that Palmer’s essay overlooks the most crucial truths about the nature of risk in recent financial innovations, among them:  (1) a lack of transparency in the transactions; (2) a slow-growing “concentration” of risks that remains in the shadows until it’s too late to stop the collapse.  This is what we now call “systemic risk” in the financial sector.  A broad public understanding of systemic risk – which takes a bit of effort for citizens, I admit – is essential to build public support against the bankers for effective regulatory reform.  The security of your retirement assets depends on your making this effort.

Satyajit Das: Pravda The Economist’s Take on Financial Innovation


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Environmental Release of Genetically-Engineered Mosquitoes: The Latest Episode in Frankenstein-Type Scientific Adventures

Environmental Release of Genetically-Engineered Mosquitoes:

The Latest Episode in Frankenstein-Type Scientific Adventures

Mosquitoes [PDF]

William Leiss (2 February 2012)


The subtitle for this essay is merely descriptive – not at all intentionally provocative – and is meant to be taken literally.  By “Frankenstein-type” I mean, not the scientific work itself, but rather the arrogant and thoughtless act of a scientist in releasing a novel entity into the environment without adequate notice or prior discussion with the public, whether accidentally (as in the case of Mary Shelley’s story) or deliberately.  Should this practice continue, as I suspect it will, almost certainly there will eventually be a very bad ending – for science itself.  Only remedial action by other scientists themselves can head it off, and so far such action is noteworthy by its absence.  They will regret this omission.


Yesterday’s story in Spiegel International Online by Rafaela von Bredow, “The controversial release of suicide mosquitoes” (http://spon.de/adztv), prompted me to look further.  And sure enough, I had missed an earlier report in the publication I most rely on for such matters, The New York Times, in the edition dated 31 October 2011, written by Andrew Pollack:  “Concerns raised over genetically engineered mosquitoes” (http://tinyurl.com/7remh3q).  Other sources for this issue can easily be found by putting “genetically engineered mosquitoes” into your preferred Internet search engine.

The Aedes aegypti mosquito carries the dengue virus, which causes the most important insect-borne viral disease (dengue fever) in the world.  Worldwide there are an estimated 50-100 million cases and at least 20,000 fatalities (mostly children) annually, and there is no vaccine or adequate therapy.  It is a serious public health burden in many countries.  Papers in the scientific literature about the possibility of attacking the problem by modifying or genetically engineering the mosquito itself have appeared over the past fifteen years.  The dominant approach of this type is to release sterilized male mosquitoes into the environment which upon mating with females will produce no young.  This approach has shown limited success.


The recent publicity has to do with a new approach in which laboratory-bred male mosquitoes are genetically engineered to express a protein that causes the larvae to die.  The gene was developed by a biotechnology company in Oxford, England.  The controversy involves the decision made by the company to seek approval for the environmental release of the GE mosquitoes in confidence – without public release of relevant information – from governments in various countries.  This began in 2009 in the Cayman Islands; later releases took place in Malaysia and Brazil, and future releases are scheduled in Panama, India, Singapore, Thailand, Vietnam, and Florida.


Here’s an extract from Andrew Pollack’s story:

In particular, critics say that Oxitec, the British biotechnology company that developed the dengue-fighting mosquito, has rushed into field testing without sufficient review and public consultation, sometimes in countries with weak regulations.

“Even if the harms don’t materialize, this will undermine the credibility and legitimacy of the research enterprise,” said Lawrence O. Gostin, professor of international health law at Georgetown University.

Luke Alphey, the chief scientist at Oxitec, said the company had left the review and community outreach to authorities in the host countries.

“They know much better how to communicate with people in those communities than we do coming in from the U.K.” he said.

Rafaela von Bredow’s recent and useful follow-up report in Spiegel Online also includes comments from other scientists, in particular two who are working on competing projects. The first reference below is to Guy Reeves of the Max Planck Institute for Evolutionary Biology in Plön, Germany:


The geneticist [Reeves] doesn’t think Oxitec’s techniques are “particularly risky” either. He simply wants more transparency.  “Companies shouldn’t keep scientifically important facts secret where human health and environmental safety are concerned,” he says.

Reeves himself is working on even riskier techniques, ones that could permanently change the genetic makeup of entire insect populations. That’s why he so vehemently opposes Oxitec’s rash field trials:  He believes they could trigger a public backlash against this relatively promising new approach, thereby halting research into genetic modification of pests before it really gets off the ground.

He’s not alone in his concerns. “If the end result is that this technology isn’t accepted, then I’ve spent the last 20 years conducting research for nothing,” says Ernst Wimmer, a developmental biologist at Germany’s Göttingen University and one of the pioneers in this field.  Nevertheless he says he understands Oxitec’s secrecy:  “We know about the opponents to genetic engineering, who have destroyed entire experimental crops after they were announced. That, of course, doesn’t help us make progress either.”




H. G. Wells published his novel, The Island of Doctor Moreau, in 1896:  See the Wikipedia entry, http://en.wikipedia.org/wiki/The_Island_of_Doctor_Moreau; the entire book is online at:  http://www.bartleby.com/1001/.  His story deals with a medical scientist living on a remote island who creates half-human/half-animal creatures.  In more recent times we have become aware of experiments in genetic engineering, such as cloning, that have been done in some countries, notably South Korea, and have raised serious issues in scientific ethics.  (See the New York Times editorial of December 2005 [http://tinyurl.com/7xmdlgt] and follow the links, or just search for “cloning South Korea.”)  Later publicity concerned the cloning of human embryos in China:  See the New Scientist article (http://tinyurl.com/7sguhgq) from March 2002.  Significant differences among countries in terms of government regulatory regimes and scientific research ethics programs remind us of the Wells’ scenario.


Other modified insects using the earlier technology (males sterilized with radiation), notably the pink bollworm, have been released to control plant pests.  The GE mosquitoes from Oxitec are the first to use the new technology for a human health problem.  They could very well represent an enormous human benefit with insignificant or even no offsetting risks – although it would be very nice to have a credible and publicly-available risk assessment certifying the same (perhaps we will get one from the U. S. Department of Agriculture, which has to approve the field trial in Florida).  It is quite possible that very few people living in countries affected by dengue fever would have any objections to the use of GE mosquitoes.


But the biggest risk involved in the use of unpublicized field trials (environmental release) for GE mosquitoes is to scientists and scientific research itself.  Readers of my recent blog, (http://leiss.ca/wp-content/uploads/2011/12/Nature-is-the-biggest-bioterrorist.pdf), on the genetic engineering of the H5N1 avian flu virus, will recall the interesting issues in scientific ethics raised in that case which are different from, but related to, those in the current one.


Both of these sets of issues encompass the ability and willingness of the scientific community to “police” research practices with the long-term public interest in mind.  To do so they would have to create deliberative structures both international in scope and sufficiently robust to enforce their strictures on unwilling members of their community – for example, by an enforceable policy of denial of research grant funding and publication in journals.  (The suggestion here avoids any necessary involvement by government authorities.)  This is a tall order, to be sure, but there are a few precedents, notably the 1975 Asilomar Conference (http://en.wikipedia.org/wiki/Asilomar_Conference_on_Recombinant_DNA).[1]


In the case of GE mosquitoes, the offhand comment by the lead scientist, Luke Alphey, quoted above from Andrew Pollack’s article, with its crude justification for ignoring his own clear responsibility for initiating public disclosure and deliberation, is telling.  The other scientists who were quoted in the two articles referenced above were obviously unhappy with him, but they did not suggest what remedies might be imposed for such irresponsible acts.  This despite their recognition that it is the genetic engineering of plants and animals that has been already a source of both intense public curiosity and equally great concern, a phenomenon that will inevitably grow in importance with each further advance in scientific discovery and application in this field.  For scientists to ignore the risks to their own activities in this domain is foolish and short-sighted indeed.

[1]The first famous example was the debate among some scientists over the use of the first atomic bomb in 1945:  See the discussion in the Back Section of my 2008 book, The Priesthood of Science (http://www.press.uottawa.ca/book/the-priesthood-of-science).

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Complexity cloaks Catastrophe

“Complexity cloaks Catastrophe”

William Leiss (17 January 2012)

Complexity cloaks Catastrophe – PDF

Good risk management is inherently simple; adding too many complexities increases the likelihood of overlooking the obvious.

Leiss, “A Short Sermon on Risk Management” (http://leiss.ca/?page_id=467)


The quoted phrase that forms the title for this paper comes from the opening pages of Richard Bookstaber’s indispensable 2007 book, A Demon of our own Design:  Markets, hedge funds, and the perils of financial innovations (New York:  Wiley).  This book inspired much of my own subsequent work in this area, as published in The Doom Loop in the Financial Sector, and other black holes of risk (University of Ottawa Press, 2010:  e-book available at:  http://www.press.uottawa.ca/book/the-doom-loop-in-the-financial-sector);  see the section on “Complexity” at pages 80-83).  Bookstaber’s key point is that complexity in financial innovations is itself an important risk factor for systemic failure in the financial sector.

Now the New York Times columnist Joe Nocera has written in his January 17 column, “Keep it Simple” (http://www.nytimes.com/2012/01/17/opinion/bankings-got-a-new-critic.html?hp), about an important new source for this topic.   This is a November 2011 paper prepared by staff at a firm called Federal Financial Analytics, Inc.:  “A new framework for systemic financial regulation:  Simple, transparent, enforceable, and accountable rules to reform financial markets,” available as a PDF file at:  http://www.fedfin.com/images/stories/client_reports/complexityriskpaper.pdf.

In effect, both the paper and Nocera’s commentary argue – with reference to the U. S. Dodd-Frank Act – that responding to complexities in financial innovations with complex regulatory regimes is a mug’s game.  It does not solve the problem of “complexity risk” and in fact may exacerbate that risk.  It also does a poor job of anticipating the next challenge, as the recent collapse of MF Global shows.

The Obama administration has put its faith in “smart regulation,” which ignores the fact that it is the industries being regulated which can hire the smartest people and task them with finding a way to circumvent any set of rules, however complex.  (Meanwhile, his Republican opponents work feverishly to gut his regulatory agencies of competent staff and leaders.)  Similarly, the authors of the paper, “A new framework for systemic financial regulation,” propose solutions involving new corporate-governance regimes, but the private-sector risk governance regimes failed utterly the last time around, so why on earth would the rest of us want to retry this experiment?

In the end we have to turn to the most reliable guide, Simon Johnson, whose advice is simple:  Break up the big banks.  (Follow his blogs at:  http://baselinescenario.com/; the latest is, “Refusing to take yes for an answer on bank reform.”)  Banks to big to fail should be regarded as too big to exist.  And yet the leading financial institutions in the United States are bigger than ever.  No “systemically-important financial institution” will ever be allowed to fail.  The bankers who run them know this.  They also know that they cannot be outsmarted by the regulators.


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Nature is the biggest bioterrorist

“Nature is the biggest bioterrorist”:

Scientists, viagra the Risk of Bioterrorism, pills and the Freedom to Publish

William Leiss (22 December 2011)

[Nature is the biggest bioterrorist] – PDF

The quoted sentence in the title is attributed to R. A. M. Fouchier, ailment a scientist at Erasmus Medical Center in Rotterdam and the University of Wisconsin, in an interview with The New York Times.[1]  He is the lead researcher for the team that, working in a highly secure laboratory in the Netherlands, genetically engineered the “highly pathogenic” avian influenza A(H5N1) virus so as to make it easily transmissible in mammals.  H5N1 is an extraordinarily lethal group or clade of viruses which has killed about 60% of the 600 or so humans that have been infected by it since 2003 (the virus was first identified in 1997).  A pertinent comparison is with the 1918 pandemic, which killed only about 1% of those infected.  The H5N1 viruses are easily transmissible among birds and are sometimes transmitted from birds to humans, but so far there is no evidence for direct human-to-human transmission.

Scientists have been studying its genome in order to understand why human-to-human transmission has been inhibited to date – knowing that, should this inhibition be overcome, at a time when no vaccine was available, the human death toll around the world could be enormous.  Scientists have also been trying to manipulate its genetic structure so as to identify exactly what gene changes would allow it to overcome this inhibition; working with ferrets in the laboratory, they now think they know what kinds of gene changes would enable the virus to move freely among members of a mammalian species.  In the press release from Erasmus Medical Center Professor Fouchier explains why this work was done:  “We now know what mutations to watch for in the case of an outbreak and we can then stop the outbreak before it is too late.  Furthermore, the finding will help in the timely development of vaccinations and medication.”

Now comes the tricky part.  The researchers want to publish their work in full, in the journals Science and Nature, arguing that other researchers working in this same area need to know the details in order to evaluate the results properly.  But the U. S. National Science Advisory Board for Biosecurity has asked the two journals not to publish major sections of the papers, specifically the “experimental details and mutation data that would enable replication of the experiments” – lest terrorists seek to weaponize the engineered pathogen to deliberately produce a global pandemic.

Professor Fouchier and others prefer to treat the issue as a matter of practicalities:  (1) terrorist groups cannot easily duplicate the expertise, lab equipment, and development time needed to engineer this virus, even with the blueprint in hand; (2) even if the experimental details are restricted to recognized researchers, the results will eventually be circulated more widely; (3) there are other, available candidate materials for producing biological weapons for terrorist purposes that are far easier to work with.

One problem in resolving this issue is that Professor Fouchier has muddied the waters considerably with his comment about nature being the “biggest bioterrorist.”  Another scientist, Professor John Oxford, London School of Medicine, further clouded the matter with these remarks:  “The biggest risk with bird flu is from the virus itself.  We should forget about bio terrorism and concentrate on Mother Nature.”[2]  They should both be forced to wear dunce caps and sit in the corner for a while.  As they should know, by the word “terrorism” we refer to deliberate acts of human malevolence and injustice causing great harms in the name of political objectives.  Its commonest and age-old form is state-sponsored terrorism, such as that being suffered now by the citizens of Syria and dozens of other countries around the world; non-state actors also employ it, on a much less widespread scale, and sometimes in pursuit of legitimate struggles of political resistance against tyrannical regimes.

But Mother Nature is not a terrorist.  In using this provocative language some scientists are trying to sidestep the very difficult issues in responsible decision making that have been raised by the proposal to publish this research in its entirety.  These difficulties can be seen if we array the decision problem in the form of offsetting risk scenarios:

  1. What is the probability or likelihood that the full publication of this research will enable public health agencies to save many lives – that would otherwise be lost – if and when the H5N1 virus naturally evolves into a form that is directly transmissible from one person to another? And:
  2. What is the likelihood that restricting full publication to designated members of the research community will achieve the necessary scientific advance from a public health standpoint?




  1. What is the likelihood that the full publication of this research will enable terrorists to weaponize this pathogen and deliberately cause a human pandemic that might not otherwise happen through the virus’s natural evolution?  And:
  2. What is the likelihood that the restricted circulation of these research results will succeed in keeping the information out of the hands of potential terrorists?

Framing the choices we face as a set of contrasting risk scenarios is a way of using a systematic and disciplined approach to identify the trade-offs and assumptions that are otherwise hidden in the narrative problem-formulation.  It also acts as a requirement for participants in the debate to specify what types of evidence could be assembled in support of attempts to answer these specific questions.

It would be possible, were sufficient time and resources to be made available, to undertake a formal set of risk assessments to address these four propositions; or we could just decide to rely on educated guesswork, for example, through an established procedure known as “expert elicitation” (http://en.wikipedia.org/wiki/Expert_elicitation).  This is unlikely to happen:  Some behind-the-scenes jockeying between the scientific journals, the research community, and the U.S. biosecurity committee will produce a resolution of this particular issue that the rest of us will read about later.

However, if either kind of systematic decision analysis were to be carried out and then published, all of us could perhaps learn a bit more about how to make sensible decisions of this type, which might be helpful when the next problem of this type rolls around.  Because there is a virtual certainty that there will be more problems of this type.  This is a simple function of the increasing power of scientific investigation itself, especially in highly sensitive areas like genetic manipulation and some others, such as synthetic biology and the detailed understanding and potential manipulation of brain functions.

[1] Denis Grady and William J. Broad, “Seeing terror risk, U.S. asks journals to cut flu study facts” (http://tinyurl.com/89w7cfl) and Doreen Carvajal, “Security in flu study was paramount, scientist says” (http://tinyurl.com/76kn2om), The New York Times, 21 December 2011; Fergus Walsh, “When should science be censored?” (20.12.11)  http://www.bbc.co.uk/news/health-16275946.   For a very thorough summary of background information see the Wikipedia article at:  http://en.wikipedia.org/wiki/Influenza_A_virus_subtype_H5N1.

[2] See further Richard Ingham, “Scientists fight back in ‘mutant flu’ research,” The Globe and Mail, 22 December 2011, A14:  http://tinyurl.com/77tm52w.

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Germany as Saviour or Demon: Political Risk in the Eurozone and the Burden of History

Germany as Saviour or Demon:

Political Risk in the Eurozone and the Burden of History

[Germany as Saviour or Demon] – PDF

William Leiss (9 December 2011)


Introductory Note:

These reflections were inspired by the insightful article published on December 6 in Spiegel Online, doctor “A controversial paragon:  Europe shudders at Germany’s new-found power”: treat 1518, viagra sale 801982,00.html”>http://www.spiegel.de/international/europe/0,1518,801982,00.html.  See also (1) the opinion column by Jakob Augstein, “The return of the ugly Germans:  Merkel is leading the country into isolation:” 8 December: http://www.spiegel.de/international/europe/0,1518,802591,00.html and (2) Christoph Schult, “Summit advice:  How about a little humility, Frau Merkel?” 8 December: http://www.spiegel.de/international/europe/0,1518,802515,00.html.


The sheer scale of the irony now playing out on the European continent is mind-boggling.  The first phase of the Eurozone crisis is just about over and the second – marked by the German-French alliance’s proposal for a dramatic upgrade in fiscal integration of at least some subset of the EU’s national economies – is about to begin.  Almost certainly the  practical implementation of this new strategy will set the nations who sign up for it on a one-way street:  The external oversight and self-discipline for national budgets that will be required to halt the euro’s downward slide toward destruction will lead, step by step, to a deeper functional unity, first in fiscal matters and later in other institutions.

If the financial markets can be persuaded to accept it as a viable long-term strategy, they will do so only with a highly sceptical mindset.  Those markets will be alert to any hints of backsliding, playing for time, or fakery in the national accounts, and undoubtedly they will punish the malingerers severely should they find evidence of the same.

As the marvellous Spiegel Online article shows, Germany appears to have won over the French – not just Sarkozy, but much of the French decision-making élite more widely – to its concept of long-term financial and economic health.  In a speech in November Sarkozy said:  “All my efforts are directed towards adapting France to a system that works.  The German system.”  In fact, as of now, Germany stands alone as the one and only model for all of the Eurozone (and indeed EU) economies.  Thus 66 years after France and the rest looked around, in the Summer of 1945, at the immense destruction, loss of life, and raw memories of the unimaginable savageries perpetrated on them by their German neighbours, are they about to say:  “We are all Germans now”?

One of the smaller ironies for the French was the news, just this past week, that German police were raiding the homes of the last surviving members of the SS unit that carried out the notorious massacre at the village of Oradour-sur-Glane on 10 June 1944:  There were only two survivors (out of almost 700 men, women, and children); the French have never rebuilt the town (http://www.oradour.info/), leaving it as a memorial to those who died there.  After all this time, the German police apparently were looking for evidence of their complicity in that shameful episode.

But ironies abound.  Who in 1945 could have imagined that in 2011 the Foreign Minister of Poland – a country which suffered so terribly during the Nazi occupation – would give a speech in Berlin in which he said:  “I’m less worried about Germany’s power than about its failure to act.  It has become Europe’s essential nation.  It must not fail in its leadership.”  (See also the New York Times article, December 9, “Europe’s debt crisis brings two former foes closer than ever”:  http://tinyurl.com/7j66llw.)

Meanwhile, in the nation whose citizens have been ordered to impose upon themselves the harshest “austerity” measures to date – Greece – Germany’s presumed role in dictating the bitter medicine they are being forced to swallow is palpable to them.  (In both Dublin and Athens, the EU bureaucrats who have been sent in to oversee these measures are referred to by the natives as “the Germans,” no matter what their actual nationalities happen to be.)  Their memories of the harsh Nazi occupation in 1941-44 are still easily recalled.  So most Greeks will not be joining in the chorus of, “We are all Germans now.”  But could this too change?

As it battles for its fiscal health the EU will arrive at a crossroads, perhaps in one year, or two, or longer.  Persisting along the straight and narrow path – that is, emulating the German model – could, if all goes well, allow citizens of Europe to see with sufficient clarity through the chill winds of austerity to a better and stable collective future.  But in traversing this path they will come upon alternative turnings from time to time.  Taking some of those turnings will mean rejecting the medicines they are now being offered and digging in their heels, resisting the restructurings of employment patterns, pension and retirement schemes, and (to some extent) the welfare benefits they now enjoy but cannot really afford.  There will be strong temptations – already on view in Greece – for citizens and public officials to seek to thwart the application of austerity measures through sabotage and noncooperation.

They may even try to ignore their budgetary targets, but they will not be able to conceal their noncooperation, as before, by faking the national accounts.  What is perhaps even worse, at the political level they may try very hard to cooperate but be unable to do so, because the institutional changes that are presupposed in the austerity targets simply cannot be carried out in the necessary time-frames.  This is the scenario described in a very recent OECD report (Spiegel Online, 8 December, “OECD report questions Greece’s ability to reform”: http://www.spiegel.de/international/europe/0,1518,802514,00.html.)  Should this scenario play out, punishments may arrive from the North (because citizens there will demand this of their governments), and national bankruptcies will loom, leading to full-blown social crises.  It is impossible to forecast how that might all end.

In short, there are enormous political risks inherent in Europe’s present situation.  Much of the pathetic, fumbling search for pseudo-solutions during the last two years has been designed to avoid entering deeply into the zone of political risk by confronting the need for radical changes to the EU institutions.  For example, if national referendums are required to ratify such changes, will the necessary approval be given?  To take the case of Ireland, it was the national government there which made the catastrophic mistake of nationalizing 100% of the debt of its private banks.  The money that enabled them to do so, when their sovereign debt could no longer be financed through the markets, came from the EU.  Will the Irish citizens, knowing how long it will take them to dig themselves out from under this monumental blunder, perhaps conveniently forget how this mess was made and take out their grievances on the EU?

The risk will have to be run, because the earlier strategy is broken.  There will be no quick fix, as Merkel sees clearly, and it is impossible to say how much time will be required; but all the while the financial markets will have Europe’s politicians on a very short leash.

It’s far too simplistic to “blame the markets.”  This is entirely the politicians’ own fault, because in the long run-up to the 2008 crisis they had been fiddling while their bankers stuffed their huge businesses with combustible materials.  European politicians watched from the sidelines as the Irish and Spanish housing bubbles expanded; they allowed their banks to bulk up on toxic assets from the US subprime mortgage assembly-line; they acceded by default to the weakening of international regulatory regimes that was pushed by US and UK interests; they allowed their banks to accumulate large portfolios of sovereign debt instruments on the theory that they were “risk-free”; they turned a blind eye to the Greeks’ blatant lies about their budgetary deficits; and so on.  A slice of these depressing stories is told in Michael Lewis’s inimitable and entertaining style in his latest book, Boomerang:  Travels in the new third world (New York:  Norton, 2011).

The latest German-and-French-led initiatives are a hopeful sign, but there is no guarantee that they will succeed in staunching the bleeding in the Eurozone.  The risk of political disintegration in the EU will remain high for some time to come.  But if it works in the end, with Germany leading the way to a brighter collective future, would this not be the supreme irony, after all that happened in the preceding century?

Author’s Note:

My personal interest in Germany’s role in the burden of history in Europe is dictated in part by the fact that I am of German ancestry, and in part by my long apprenticeship with Herbert Marcuse.  I have discussed this autobiographical background, including reflections on Marcuse and Heidegger, in a recent interview, available at:  http://www.ctheory.net/articles.aspx?id=690.

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Gutman and Marcuse and Heidegger

In a conversation with Laureano Ralon and Roman Onufrijchuk, I recall the great gift bestowed on me by the opportunity to study with great teachers, in particular the historian Herbert Gutman and the philosopher Herbert Marcuse.  Questions about  the eight years of apprenticeship I spent with Marcuse during the 1960s, both at Brandeis and UC San Diego, naturally lead to my own thoughts about his period of study with Martin Heidegger.  Basing my discussion on the brilliant and pathbreaking book by the contemporary French philosopher Emmanuel Faye, Heidegger:  The Introduction of Nazism into Philosophy [original in French, 2005; English translation, Yale University Press, 2009], I argue that Heidegger’s thought will always be morally compromised by his enthusiastic and unapologetic support of Hitler’s regime and by his own effort to synthesize his philosophical thought with Nazi ideology.  A passage in Heidegger’s postwar work, cited by Faye, describes the fate of extermination-camp victims as, in effect, a “death unworthy of death,” bringing to mind the notorious phrase, “life unworthy of life,” which was used during the Nazi period to justify the murder of groups singled out for extermination.  I undertake these reflections in the context of my own continuing struggle, as a person of German descent, with the legacy of barbarism and savagery bestowed on us by the Nazi regime, a legacy that must never be forgotten and that can never be forgiven.


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Hoaxes and Hobgoblins

This past September we learned of The University of Calgary’s embarrassment over the discovery that oil industry funds had been moved through its research accounts to carry out non-research activities dealing with climate change issues.[1]  These funds were used to support the activities of a group calling itself, buy somewhat mischievously, “Friends of Science” (http://www.friendsofscience.org/).  Of course one thinks immediately of the old saw:  “With friends such as this, who needs enemies”?  Is the irony implicit in the name intended or not (the case would be more interesting if it were).

Read full article: Hoaxes and Hobgoblins [PDF]

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Death by Debt

Here are extracts from Chapter 3 of my book, physician The Doom Loop in the Financial Sector, and Other Black Holes of Risk (University of Ottawa Press, 2010), pp. 101-2:

Thus, by the middle of 2010 six of the seven largest economies in the world looked to be in no shape … to spend their way out of another serious financial meltdown for a very long time to come [due to accumulated debt levels]….  Recent events have seriously eroded the margin of safety in the discretionary public resources available to most of the world’s wealthiest economies; that is, the capacity of their governments to incur additional debt responding to a further financial crisis,…”

Read the full article: Death by Debt [PDF]

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European Debt Crisis in three acts

The Online English Edition of Der Spiegel has a brilliant analysis of the European debt crisis that is not to be missed.

Read “The Ticking Euro Bomb” (October 5-7, no rx 2011):

Act I:

Part 1, advice Section 1:  “How a good idea became a tragedy”:  http://www.spiegel.de/international/europe/0,1518,790138,00.html

Part 1, Section 2:  “The Greeks jump at the opportunity”: http://www.spiegel.de/international/europe/0,1518,790138-2,00.html

Part 1, Section 3:  “The critics of the Euro”: http://www.spiegel.de/international/europe/0,1518,790138-3,00.html

Act II:  Life with the Euro (2001 – 2008):

Part 2, Section 1: “How the Euro Zone ignored its own rules”:


Part 2, Section 2:  “The Greek deception is discovered”: http://www.spiegel.de/international/europe/0,1518,790333-2,00.html

Act III:

Part 3, Section 1:  What options are left for the common currency? http://www.spiegel.de/international/europe/0,1518,790568,00.html

Part 3, Section 2:  Greece adrift http://www.spiegel.de/international/europe/0,1518,790568-2,00.html

Part 3, Section 3:  Design defects, political weakness, public disinterest http://www.spiegel.de/international/europe/0,1518,790568-3,00.html

Part 3, Section 4:  Are European rescue efforts doomed to fail? http://www.spiegel.de/international/europe/0,1518,790568-4,00.html

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Political Risk in the Middle East: The Emergence of Turkey

In case you missed the important and perceptive article by Doug Saunders, in Saturday’s Globe and Mail (“Why the West quietly cheers Turkey’s Rise,” 17 September 2011, A16: http://tinyurl.com/3sucw5d), here is a short summary: Turkish Prime Minister Recep Tayyip Erdogan was well-received during a visit last week to the capitals of Egypt, Tunisia and Libya. This and other recent initiatives appears to mark a significant shift in Turkey’s foreign-policy orientation, away from Europe and the prospect of EU membership and toward the Arab world, which of course remembers Constantinople as the capital of the Ottoman Empire, which ruled much of the Middle East and North Africa for four centuries, until it finally collapsed for good in 1922.Political Risk in the Middle East

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Two United States Government Reports On the Gulf Oil Spill

Summaries – and links back to the originals – on the reports on the oil spill.

Gulf Oil Spill Reports copy

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Prolonging the Agony: Europe’s Sovereign Debt Crisis

When will the senior political and financial leaders in European countries come to their senses? When will they concede that their current policies to contain the debt crisis are not working and cannot be made to work? How long are they going to prolong the agony of waiting for the next wave of contagion to strike?

Prolonging the Agony

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Three new papers on Risk

Three papers on risks associated with the long-term storage of high-level radioactive waste in Canada, mind commissioned by the Nuclear Waste Management Organization: Go to http://www.nwmo.ca/conceptofrisk

Paper #1: How should matters of risk and safety be discussed?

The first paper addresses the question of how to approach discussions about risk in this area. Four “reference frames” are used to demonstrate the different approaches or perspectives that can be applied to a conversation about this risk: the energy policy frame; the risk and safety frame; the overriding values frame, and; the geographical frame.


Paper #2: How might communities organize their discussions about hosting a site for used nuclear fuel?

This paper presents a variety of deliberative tools that a community might use when holding discussions about hosting a facility. Communities involved in a site selection process may wish to consider how the process of engagement might unfold in the context of their own unique situation, and the author describes some types of formal and informal methods for facilitating reasoned debates about controversial issues.


Paper #3: What is happening in other countries where similar issues about used nuclear fuel are being discussed?

This final paper deals primarily with high-level radioactive waste management and provides an overview of the plans of various countries to deal with their high-level waste. All of the information is taken from publicly-available Internet sources, most of which are websites maintained either by national agencies that have legal responsibility for the waste within their borders, or international agencies with other types of mandates in this area. Profiles for 16 countries are provided, along with a large collection of references and links to internet-based resources, as well as a table illustrating the progress of each country in managing radioactive waste.


William Leiss, OC, PhD, FRSC

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Risk Blogs – Summer 2011

The following series of short essays was written in the period June – August 2011 and posted on my website: www.leiss.ca. Similar pieces will be added to the series on a regular basis. If you are interested in them you may check the website periodically or follow me on Twitter (@WilliamLeiss), where I post a Tweet (a) each time a new short blog appears on my website and (b) when I read something in the current press relevant to risk issues and provide the URL for those who also might want to read it.

LeissRiskBlogsSummer2011rev2 [PDF]

Update: the PDF was updated August 29, 2011

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Financial Risk Management: Duping the Rubes

Before 2008 financial industry professionals arranged to deceive local government officials around the world about the risks inherent in their “structured” products, pilule costing the citizens those officials worked for huge losses they could ill afford. Much of this sad story has been told in excellent investigative journalism accounts published in The New York Times, some of which are referred to in my 2010 book, The Doom Loop in the Financial Sector and Other Black Holes of Risk (University of Ottawa Press), pages 38-43. Here I refer to developments occurring after the book was finished, as well as one other newly-reported important episode, involving school districts in the state of Wisconsin.

Duping the RubesRev3 [PDF]

Update: the PDF was updated October 3

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Difficult Risk – Risk Tradeoffs: Political vs. Financial Risk in the EU

There was an important article by Jack Ewing and Liz Alderman in the August 10 edition of The New York Times, thumb entitled “Some in Germany want Greece to temporarily exit the Euro Zone.” This article takes up issues that have been quietly heating up in the background for some time already but which are, cialis inevitably, becoming harder to ignore. Ever since the first EU bailout of Greece in May 2010, and intensifying with the subsequent Portuguese rescue mission and especially the second Greek one, both in 2011, comments emanating from Germany and elsewhere have cast aspersions on the “profligate southerners” who have come to depend on their “frugal” northern compatriots to rescue them from financial disasters of their own making.

Full article: Risk Risk Tradeoffs [PDF]

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Fat Tails and Climate Change: Catastrophic Failures in Risk Management, 5

Image courtesy of UNEP / click image for original

The phrase “fat tails” became familiar to some people after the storm broke in 2008’s global financial crisis. A fat tail refers to the probability and consequences of a possible event that is outside the bounds of our normal expectations, find as defined either by our prior experience or by accepted theories – for example, link theories of the behaviour of financial markets.1 More specifically, it refers to the probability of an adverse event (such as a financial crisis) that is both more likely to occur than is “normally” expected, and that if it should occur could have catastrophic dimensions. [See www.fattails.ca and the lovely 2010 animated graphics in The Economist: http://econ.st/n9xYZq.]

Fat Tails and Climate Change PDF

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Risk Management Cases: Drilling for Shale Gas

Image courtesy of 32BJ/Flickr

Environmental risks associated with drilling for shale gas, prescription and the extraction process known as “hydraulic fracturing” [“fracking”], are receiving a good deal of attention in Canada, the United States, and elsewhere.

The state of New York has had a moratorium on shale gas development for the past year, but Governor Mario Cuomo has recommended that it be lifted in favour of permitting activity in selected areas. The Province of Quebec now has a two-year moratorium in place and has indicated that further research will be required before it is known whether the environmental risks can be limited to acceptable levels.

Readers who are interested in this issue, especially those who live in or near areas where underground shale deposits may attract this activity, will be interested in the following current resources.

Shale Gas Drilling [PDF]

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Financial Risk: The World turned Upside Down

Image courtesy PIAZZA del POPOLO / Flickr

Here’s the latest from the Greek debt crisis:

“Europe is seeking to avoid a default at all cost because it could also initiate payment of credit-default swaps, there with unpredictable results. There is little public information on which financial institutions have sold credit-default swaps and might have to absorb losses if Greece defaulted, there but it is likely that American banks and insurance companies have taken on the largest share. The shock to the global economy might compare to the collapse of Lehman Brothers in 2008, illness the European Central Bank has warned.” (Jack Ewing & Landon Thomas Jr., “Europe faces tough road on effort to ease Greek debt,” The New York Times, 4 July 2011)

Wait a minute! In credit default swaps the first party pays a premium to a second party in order to “insure” the value of an amount invested in corporate or government bonds made by the first, and the second party guarantees to make up the shortfall if that investment loses value, for example where the issuers of the bonds default on their debt.* Derivatives such as credit default swaps are a risk management strategy for investors, protecting them (for a price) against large losses. So how does this very sensible risk mitigation strategy, used by individual investors, end up causing or exacerbating another broad financial crisis?

The World turned Upside Down

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Catastrophic Failures in Risk Management, 4: The Terrorist Attack on Air-India Flight 182

Image courtesy Corinna A. Carlson / Flickr

The month of June 2011 marks the first anniversary of the release of Air India Flight 182: A Canadian Tragedy, illness the final report of the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182, troche headed by Mr. Justice John Major.

The mid-flight destruction of Flight 182 off the Irish coast on 23 June 1985 killed all 329 passengers and crew; an explosion at Narita Airport in Japan, which was part of the same terrorist plot, killed two baggage handlers there. The resulting toll represents, still today, the second-largest loss of life (second only to the September 11, 2001 events in the United States) in a single terrorist plot ever to occur anywhere in the world.

Catastrophic Failures in Risk Management 4 [PDF]

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