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Tuesday, July 06, 2010


Why Everyone Owes Everyone and No One Can Pay, by John Lanchester (Allen Lane, 2010)

John Lanchester's account of how the global financial situation became so serious is peerless.

by William Leith

The Observer (February 07 2010)

John Lanchester's Whoops! is a book that made my head spin. That's partly because of the author's speed of thought - here is an explanation of how the global economy works, in 240 blistering pages. And it's also because of the sheer, dizzying maths of it all - the hundreds and thousands, the billions and trillions. But it mostly made my head spin out of sheer admiration. I must have read thirty books on the global economic crisis (I'm writing one myself) and this is the best. No question.

Lanchester, who grew up in Hong Kong and whose father worked for the Hong Kong and Shanghai Bank, is not a banker himself, but he has a wonderful gift for explaining complex things in a simple way. He says that, if money were alive, it would always be looking for ways to get bigger. Reading this made me see that as mere human beings, we are its servants; we are here, it seems, to facilitate the process.

Why did the crisis happen? Lanchester says that it was because of a climate, a problem, a mistake and a failure. When he was a kid in Hong Kong, he says, he lived in a climate of pretty much unfettered capitalism. But Britain and America were different - the capitalism in western countries was softer and gentler. Why? Because the west was always aware of the communist world. The guys on the other side of the Iron Curtain kept us on our best behaviour.

But then communism died. So capitalism, without a Marxist invigilator, started to cheat. Capitalism went wild. Money, which always wants to grow, found new ways of growing. Here's where the problem comes in. The problem, as Lanchester sees it, was: sub-prime mortgages. Or, to be more precise, the problem was the financial instruments that enabled - and, in some ways, forced - financiers to lend money to people who couldn't pay it back, thus causing the crash.

It is here that Lanchester is at his best. I've never seen a more concise description of "credit default swaps" - deals allowing banks to lend the same money over and over by insuring it with a third party. For a while, everybody is happy. The loans flood the economy with money, which increases the price of assets. Soon, if you're a banker and you're not doing this, you're toast. But then the honeymoon ends. People default on their loans. Asset prices fall. The insurance company crashes. Banks seize up. We are screwed.

Then there was the mistake. Put concisely, bankers did not understand the nature of risk. That's partly because they were working from mathematical models. But human beings are not like mathematical models. When your model says that something is so unlikely it's practically impossible, it's not. Where humans are concerned, all sorts of things are possible. What is "the most common mistake of very smart people"? It's "the assumption that other people's minds work in the same way that theirs do". In other words, like mathematical models.

The failure was one of regulation. As Lanchester puts it, for a while the economy had a funny smell. But the people who should have pointed this out, and done something about it, didn't. "Mainly", says Lanchester, "they were funny smells to do with things which were just too good to be true". But who wants to burst a bubble? Not investors, not politicians, and especially not bankers. So the bubble keeps growing. Until it bursts.

"Now what?" asks Lanchester. Well, we have to pick up the bill. And how much do we owe? That's one of the problems - nobody knows for sure. In April 2008, Alistair Darling thought the "projected deficit" for the next year would be GBP 38 billion. In November of that year, he thought it would be GBP 118 billion. In April 2009, it had grown to GBP 175 billion. Pain will follow. That, says Lanchester, is "because we in Britain are, to use a technical economic term, screwed". (c) Guardian News and Media Limited 2010

Bill Totten


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