Bill Totten's Weblog

Thursday, July 08, 2010

Laughing All the Way to the Bank

IOU - Why Everyone Owes Everyone and No One Can Pay by John Lanchester (Simon & Schuster, 2010).

by Dwight Garner (January 05 2010)

If you wanted to try to make sense of the global banking crisis, instead of merely weeping openly at your ATM balance, 2009 was a very good year. Bookstores were filled with volumes that, with expert twenty twenty hindsight, explained how capitalism went to hell. The blame was spread around: to politicians (for deregulating financial markets), to bankers (for gambling with exotic derivatives they barely understood) and to the rest of us (for living beyond our means, like insatiate zombie piglets).

This nightmare isn't over. We'll be living with the fallout from the banking crisis for decades and devouring plenty more books about it too. The whole episode is a kind of intellectual and moral Superfund site, an oozing gift that will keep giving. But here's a prediction: Few if any of these books will be as pleasurable - and by that I mean as literate or as wickedly funny - as John Lanchester's IOU: Why Everyone Owes Everyone and No One Can Pay.

Mr Lanchester, who is British, isn't an economist or a business journalist. He's a novelist (and a talented one; try The Debt to Pleasure, 1997), a man with no special financial expertise whatsoever. A few years ago he began following the financial meltdown for research purposes, as background for a novel he was writing. He soon realized, he says, "that I had stumbled across the most interesting story I've ever found".

It's a story that begins, as these stories are wont to do, with the fall of the Berlin Wall. The capitalist West won its "ideological beauty contest" with the communist East, Mr Lanchester writes, which was good news except for this: Suddenly "there was no global antagonist to point at and jeer at the rise in the number and size of the fat cats; there was no embarrassment about allowing the rich to get so much richer so very quickly".

Once upon a time in America and Britain, he observes, "the jet engine of capitalism was harnessed to the ox cart of social justice, to much bleating from the advocates of pure capitalism, but with the effect that the Western liberal democracies became the most admired societies that the world had ever seen".

Then the Wall crumbled, and "the jet engine was unhooked from the ox cart and allowed to roar off at its own speed. The result was an unprecedented boom, which had two big things wrong with it: It wasn't fair, and it wasn't sustainable".

The snidest villains and the greediest buffoons in the narrative are the bankers and other financial wizards who began recklessly playing with new, risky, little-understood tools to get richer faster - tools that ostensibly hedge against risk but also dramatically increase it. If you don't know how derivatives or credit default swaps work, or what securitization is, or why futures are riskier than options, this is a book for you. Mr Lanchester explains these things methodically, with mathematical rigor, but he is also, crucially, guided as much by perception and feel.

"We are a long, long way from a single quote for next season's wheat crop", he notes. "The contemporary derivative is likely to involve a mix of options, futures, currencies and debt, structured and priced in ways which are the closest extant thing to rocket science. Mathematics PhD's are all over the place in this business."

Mr Lanchester finds loads of bleak humor here. "Warren Buffett was doubly right to compare the new financial products to 'weapons of mass destruction' - first, because they are lethal, and, second, because no one knows how to track them down", he writes.

He also compares the banking crisis to the birth of postmodernism. "For anyone who studied literature in college in the past few decades, there is a weird familiarity about the current crisis", he says. "Value, in the realm of finance capital, parallels the elusive nature of meaning in deconstructionism".

IOU crosses over into black satire when Mr Lanchester describes how bankers used their new tools to make money from poor people, the worst credit risks, by prying their cash loose through predatory lending, then pooling this money and selling it off. Who cared if these people defaulted on their mortgages? The risk had already been passed along to others, and ultimately, when banks failed, to taxpayers. Mr Lanchester calls this "a 100 percent pure form of socialism for the rich".

With steam shooting from his ears, he summarizes:

So: a huge, unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialized. That is literally nobody's idea of how the world is supposed to work.

Mr Lanchester's history lesson is peppered with dead-on references to everything, including "Annie Hall", "The Simpsons", "The Wire", Hemingway and Jacques Derrida. He is effortlessly epigrammatical. ("In a sense, credit isn't just an aspect of the economy, it is the economy".)

His wit pops out at unexpected angles. About the ever-riskier wagers bankers were making, he writes:

This wasn't just looking for trouble, it was sending trouble a 'save the date' card, followed by a formal invitation, followed by nagging e-mails and phone calls just to make absolutely sure.

He also lays out a wide series of necessary reforms, including requiring banks to keep more capital on hand and separating investment banking from everyday banking ("the casino" from "the piggy bank").

These reforms include personal ones, aimed at me and at you. Do we need so much stuff in our lives? he asks. "In a world running out of resources, the most important ethical, political and ecological idea can be summed up in one simple word: 'enough' ".

Mr Lanchester is no admirer of George W Bush, but he does enjoy citing Mr Bush's comment in late 2008 about the worsening economy: "This sucker could go down". Mr Lanchester, in 2010, isn't quite that pessimistic. But he does note that we're all about to get the bill from the financial bailouts, a bill that could easily top $4.6 trillion.

How much money is that, anyway? Brace yourself. That number, Mr Lanchester writes, paraphrasing one expert, "is bigger than the Marshall Plan, the Louisiana Purchase, the Apollo moon landings, the 1980s savings and loan crisis, the Korean War and the total cost of NASA's space flights, all added together - repeat, added together (and yes, the old figures are adjusted upward for inflation)".

Before you begin to cry, pick up a copy of IOU. Good humor and good company will be the things that'll get us through.

Bill Totten


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