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I.O.U.: Why Everyone Owes Everyone and No One Can Pay
Part economic primer, part fiscal and historical analysis, New Yorker and London Review of Books contributor John Lanchester offers his brilliantly witty, succinct overview of the current financial crisis.
For most people, the reasons for the sudden collapse of our economy remain obscure. I.O.U. is the story of how we came to experience such a complete and devastating financial implosion, and how the decisions and actions of a select group of individuals had profound consequences for America, Europe, and the global economy overall. John Lanchester begins with "The ATM Moment," that seemingly magical proliferation of cheap credit that led to an explosion of lending, and then deftly outlines the global and local landscapes of banking and finance. Viewing the crisis through the lens of politics, culture, and contemporary history -- from the invention and widespread misuse of financial instruments to the culpability of subprime mortgages -- Lanchester draws perceptive conclusions on the limitations of financial and governmental regulation, capitalism's deepest flaw, and, most important, on the plain and simple facts of human nature where cash is concerned.
Weaving together firsthand research and superbly written reportage, Lanchester delivers a shrewd perspective and a digestible, comprehensive analysis that connects the dots for the expert and casual reader alike. I.O.U. is an eye-opener of a book -- it may well provoke anger, amazement, or rueful disbelief -- and, as the author clearly reveals, we've only just begun to get ourselves back on track.
272 pages, Hardcover
First published December 14, 2009
113 people are currently reading
3380 people want to read
About the author
John Lanchester
38books576followersJohn Lanchester is the author of four novels and three books of non-fiction. He was born in Germany and moved to Hong Kong. He studied in UK. He is a regular contributor to The New Yorker and was awarded the 2008 E.M. Forster Award. He lives in London.
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May 16, 2015
This brilliant, scary little book is the first account I've seen of the credit crunch which truly made sense. I read it in a day, and, if you're at all interested in politics, economics or current affairs, I can't recommend it too highly. Lanchester is an acclaimed novelist, which shows in the witty and stylish writing; here, he also proves that he's a great investigative journalist.
The credit crunch was a first-magnitude disaster, and at several points I found myself comparing Whoops! to the magisterial report written after the Columbia Shuttle crash in 2003. The Columbia Investigation Board looked at the accident from three perspectives. First, they had to determine the proximate cause of the accident, in engineering terms: what specific mechanical failure made the Shuttle break up over Texas and crash? Second, they wanted to know what went wrong at the managerial level: how did this problem slip through the elaborate net of safety checks that preceded the launch? Third, and most far-reachingly, they tried to understand the problem at the level of the whole NASA organizational ethos. Why was management focussing on the wrong targets, to the point where safety standards could erode and allow a catastrophe like this to happen?
As everyone now knows, their answers were as follows. The proximate cause of the accident was a piece of falling foam, which cracked the front edge of the Shuttle's wing, allowing incandescent gas to get into it on reentry and melt everything inside. The managerial problem was, in a now-famous phrase, NASA's "broken culture of safety". Even when things had previously been considered dangerous, a tendency developed to assume that they were in fact safe if they had been seen to occur before without an accident having happened. Finally, the Board concluded that NASA had lost its way. No one knew any more what they were trying to achieve, and the artificial nature of their main goal, to keep building the probably useless Space Station, meant that senior managers were unable to prioritise sensibly.
So, back to the credit crunch. The Western World's banks filled up with toxic debt and very nearly fell from the skies. Why? And how? I'd heard many of the pieces before: subprime mortgages, CDOs, deregulation, excessive leveraging. But I couldn't put it all together. Some American and British banks had lent money to people who, rather too often, weren't capable of paying it back. Was that such a bad mistake that it had the potential to break the whole world's financial systems? And, if it was, how could they have been so stupid as to allow it to happen?
Here's a précis of Lanchester's explanation; I'll start, as he does, with the broken culture of safety. You deposit your money in the bank, and they lend it out at interest. As long as they do this carefully, and are sure enough of getting the money back, they make money for you and money for themselves. The bank's business is to manage the associated risk of not getting back the money that it's loaned out. A crucial issue is leverage. The bank would ideally like to lend out as much money as possible, so that it can make as much profit as possible. At the same time, caution dictates that the bank shouldn't make bets that are too large, because that increases the probability of something going wrong. If too many people default on their loans, the bank will run out of money. The leverage is, roughly, the ratio between how much money the bank loans out, and how much it's keeping to cover loans that default. By 2008, British and US banks had a leverage of about 50. So, they had to be very careful, because if even a small proportion of their loans went sour they would be bankrupt. Evidently, they weren't sufficiently careful.
Why? Well, some very smart people had recently invented these complex financial instruments called Collateralized Debt Obligations (CDOs). They let a bank package up a bunch of debt, pull it apart into various pieces with different associated levels of risk, and sell those pieces on to other banks. The CDO was basically insurance on the debt. The banks loved this idea, because, once they'd turned their debts into CDOs and sold them to other people, those debts weren't formally counted as debts any more. They could still pick up interest on them, but they were free to loan out more money, and make larger profits. Unfortunately, the mathematics of CDOs is incredibly complex. Even if you have a PhD in statistics, you won't necessarily understand it very well. I'm pretty sure that the CEOs of these big banks, who were making the key decisions, didn't all have PhDs in statistics.
The banks loaned money to every home-owner they could find who might be considered a reasonable risk, but they still wanted more profits. They started to wonder about the other people, the ones who normally wouldn't be considered reasonable risks; people with bad credit histories, or unsafe jobs, or no jobs at all. I had not previously come across the phrase "ninja mortgage": no income, no job or assets. Bankers, astonishingly, decided that they could sell ninja mortgages. It was all a question of managing risk. Suppose there was some mathematical way to combine a lot of risky propositions, and turn them into a safe bet? It's not as far-fetched as it seems. You'd be insane to bet your life on the toss of a coin. But suppose someone said that they'd flip a coin 100 times. If it came up heads at least five times, you'd collect a million dollars, but if there were 96 or more tails you'd die. I'd definitely consider this offer.
So there were all these uncertain subprime mortgages, and what the bankers wanted was some way to use the magic of CDOs to turn them into safe bets. And now we come to the piece of falling foam, a part of the story that I previously hadn't heard at all. Another very smart mathematician thought he'd found a solution, using the so-called Gaussian copula function. Here it is, the formula which nearly destroyed Western civilization:
The Gaussian copula function, it was claimed, did the magic trick, and let bankers combine all those risky bets into sure-fire propositions. The credit-rating agencies were so convinced that they gave the resulting CDOs triple-A ratings: they thought that they were as secure as US Government debt.
Alas, it turned out that the mathematics wasn't as clear-cut as the bankers had believed. (Well, hardly anyone understood it, and it had never been seriously tested...) Worse, the CDOs had hidden the original debts so thoroughly that people buying them didn't actually know what they were based on. And worst of all, the bankers had somehow persuaded the US and British governments to deregulate the market in CDOs, which by now was worth tens of trillions of dollars, an amount comparable to the whole world's GNP. Unrestricted trade in CDOs was legal, but it obeyed the letter of the law while completely flouting its spirit. As Lanchester said, it was rather like discovering that, if you drove at more than 70 in an area where the speed limit was 30, the speed cameras couldn't see you. That's roughly what the bankers were doing.
When the US housing market went into a downturn, the subprime loans started defaulting. The Gaussian copula functions didn't model this situation correctly, because the statistics used to make the estimates were all very recent, and came from a rising market. The sure-fire bets weren't sure-fire at all, and unrestricted trade in CDOs had spread these bad bets everywhere. For a few days, it seemed possible that the entire world banking system would collapse.
And what was it that made this whole absurd adventure possible in the first place? How could the CEOs of the large banks risk the futures of their corporations, and indeed their countries, on a piece of untested mathematics that they didn't even understand? Lanchester has two answers. One is plain, old-fashioned greed. They had a lot, and they wanted more, and they didn't think that they, personally, were risking very much. Indeed, these people are still mostly in their jobs, and the ones whose banks have collapsed have retired with fat pensions. They called it right.
The second answer was the faith many people had that markets were the correct answer to everything. Markets were smarter than people, and people shouldn't presume to try and control them. But, with the answers now in, it seems that Adam Smith, Milton Friedman and the rest of that crowd were wrong. Markets aren't always smarter than people.
My personal feeling is that the credit crunch concluded the story of the 20th century, which was largely a demonstration of what happens when people believe in things without adequate grounds to support those beliefs. An absolute belief in the excellence of the free market turned out to be not very much more sensible than an absolute belief in the superiority of the Aryan race or an absolute belief in the dictatorship of the proletariat. I'm completely with Kurt Vonnegut:
The credit crunch was a first-magnitude disaster, and at several points I found myself comparing Whoops! to the magisterial report written after the Columbia Shuttle crash in 2003. The Columbia Investigation Board looked at the accident from three perspectives. First, they had to determine the proximate cause of the accident, in engineering terms: what specific mechanical failure made the Shuttle break up over Texas and crash? Second, they wanted to know what went wrong at the managerial level: how did this problem slip through the elaborate net of safety checks that preceded the launch? Third, and most far-reachingly, they tried to understand the problem at the level of the whole NASA organizational ethos. Why was management focussing on the wrong targets, to the point where safety standards could erode and allow a catastrophe like this to happen?
As everyone now knows, their answers were as follows. The proximate cause of the accident was a piece of falling foam, which cracked the front edge of the Shuttle's wing, allowing incandescent gas to get into it on reentry and melt everything inside. The managerial problem was, in a now-famous phrase, NASA's "broken culture of safety". Even when things had previously been considered dangerous, a tendency developed to assume that they were in fact safe if they had been seen to occur before without an accident having happened. Finally, the Board concluded that NASA had lost its way. No one knew any more what they were trying to achieve, and the artificial nature of their main goal, to keep building the probably useless Space Station, meant that senior managers were unable to prioritise sensibly.
So, back to the credit crunch. The Western World's banks filled up with toxic debt and very nearly fell from the skies. Why? And how? I'd heard many of the pieces before: subprime mortgages, CDOs, deregulation, excessive leveraging. But I couldn't put it all together. Some American and British banks had lent money to people who, rather too often, weren't capable of paying it back. Was that such a bad mistake that it had the potential to break the whole world's financial systems? And, if it was, how could they have been so stupid as to allow it to happen?
Here's a précis of Lanchester's explanation; I'll start, as he does, with the broken culture of safety. You deposit your money in the bank, and they lend it out at interest. As long as they do this carefully, and are sure enough of getting the money back, they make money for you and money for themselves. The bank's business is to manage the associated risk of not getting back the money that it's loaned out. A crucial issue is leverage. The bank would ideally like to lend out as much money as possible, so that it can make as much profit as possible. At the same time, caution dictates that the bank shouldn't make bets that are too large, because that increases the probability of something going wrong. If too many people default on their loans, the bank will run out of money. The leverage is, roughly, the ratio between how much money the bank loans out, and how much it's keeping to cover loans that default. By 2008, British and US banks had a leverage of about 50. So, they had to be very careful, because if even a small proportion of their loans went sour they would be bankrupt. Evidently, they weren't sufficiently careful.
Why? Well, some very smart people had recently invented these complex financial instruments called Collateralized Debt Obligations (CDOs). They let a bank package up a bunch of debt, pull it apart into various pieces with different associated levels of risk, and sell those pieces on to other banks. The CDO was basically insurance on the debt. The banks loved this idea, because, once they'd turned their debts into CDOs and sold them to other people, those debts weren't formally counted as debts any more. They could still pick up interest on them, but they were free to loan out more money, and make larger profits. Unfortunately, the mathematics of CDOs is incredibly complex. Even if you have a PhD in statistics, you won't necessarily understand it very well. I'm pretty sure that the CEOs of these big banks, who were making the key decisions, didn't all have PhDs in statistics.
The banks loaned money to every home-owner they could find who might be considered a reasonable risk, but they still wanted more profits. They started to wonder about the other people, the ones who normally wouldn't be considered reasonable risks; people with bad credit histories, or unsafe jobs, or no jobs at all. I had not previously come across the phrase "ninja mortgage": no income, no job or assets. Bankers, astonishingly, decided that they could sell ninja mortgages. It was all a question of managing risk. Suppose there was some mathematical way to combine a lot of risky propositions, and turn them into a safe bet? It's not as far-fetched as it seems. You'd be insane to bet your life on the toss of a coin. But suppose someone said that they'd flip a coin 100 times. If it came up heads at least five times, you'd collect a million dollars, but if there were 96 or more tails you'd die. I'd definitely consider this offer.
So there were all these uncertain subprime mortgages, and what the bankers wanted was some way to use the magic of CDOs to turn them into safe bets. And now we come to the piece of falling foam, a part of the story that I previously hadn't heard at all. Another very smart mathematician thought he'd found a solution, using the so-called Gaussian copula function. Here it is, the formula which nearly destroyed Western civilization:
The Gaussian copula function, it was claimed, did the magic trick, and let bankers combine all those risky bets into sure-fire propositions. The credit-rating agencies were so convinced that they gave the resulting CDOs triple-A ratings: they thought that they were as secure as US Government debt.
Alas, it turned out that the mathematics wasn't as clear-cut as the bankers had believed. (Well, hardly anyone understood it, and it had never been seriously tested...) Worse, the CDOs had hidden the original debts so thoroughly that people buying them didn't actually know what they were based on. And worst of all, the bankers had somehow persuaded the US and British governments to deregulate the market in CDOs, which by now was worth tens of trillions of dollars, an amount comparable to the whole world's GNP. Unrestricted trade in CDOs was legal, but it obeyed the letter of the law while completely flouting its spirit. As Lanchester said, it was rather like discovering that, if you drove at more than 70 in an area where the speed limit was 30, the speed cameras couldn't see you. That's roughly what the bankers were doing.
When the US housing market went into a downturn, the subprime loans started defaulting. The Gaussian copula functions didn't model this situation correctly, because the statistics used to make the estimates were all very recent, and came from a rising market. The sure-fire bets weren't sure-fire at all, and unrestricted trade in CDOs had spread these bad bets everywhere. For a few days, it seemed possible that the entire world banking system would collapse.
And what was it that made this whole absurd adventure possible in the first place? How could the CEOs of the large banks risk the futures of their corporations, and indeed their countries, on a piece of untested mathematics that they didn't even understand? Lanchester has two answers. One is plain, old-fashioned greed. They had a lot, and they wanted more, and they didn't think that they, personally, were risking very much. Indeed, these people are still mostly in their jobs, and the ones whose banks have collapsed have retired with fat pensions. They called it right.
The second answer was the faith many people had that markets were the correct answer to everything. Markets were smarter than people, and people shouldn't presume to try and control them. But, with the answers now in, it seems that Adam Smith, Milton Friedman and the rest of that crowd were wrong. Markets aren't always smarter than people.
My personal feeling is that the credit crunch concluded the story of the 20th century, which was largely a demonstration of what happens when people believe in things without adequate grounds to support those beliefs. An absolute belief in the excellence of the free market turned out to be not very much more sensible than an absolute belief in the superiority of the Aryan race or an absolute belief in the dictatorship of the proletariat. I'm completely with Kurt Vonnegut:
Say what you will about the sweet miracle of unquestioning faith, I consider a capacity for it terrifying and absolutely vile.Having seen the above examples, it would be nice to hope that people will be more sceptical in future. But I wouldn't count on it.
July 12, 2012
One of the few times George W. Bush ever rose to quotability came during the 2008 credit crunch, when he was heard to mutter darkly: "This sucker could go down." He wasn’t talking about the US banking system; he was talking about civilization as we know it. That’s how close we were to the abyss. Another few days and you’d have seen armed mobs looting 7-Eleven’s and Viggo Mortensen trudging down the Road.
Some day, decades from now, someone’s going to write the definitive history of the financial crisis. Until then, John Lanchester’s I.O.U. will probably stand as the go-to book. Written by an intelligent layman—or "civilian", as he sometimes prefers� it bristles with a kind of wtf, dude? incredulity. Which is only fitting. I mean, the world very nearly ended because a Chinese math geek published an equation in some obscure journal. That’s just stupefying. The whole story is just stupefying.
At the end of the day, I’d still like to believe in capitalism, which, say what you will, has always picked up the tab for liberal democracy (a point made by Lanchester himself). It’s just that, once a century or so, capitalism goes on a wild binge, maxes out the credit cards and wraps the Porsche around a utility pole. It’s the Lindsay Lohan of economic systems, and we’re married to it. Maybe we just need to accept that, in this relationship, the sexy fun times will always end in insolvency and despair, and that longish stretches of semi-normalcy are about all we can hope for.
Some day, decades from now, someone’s going to write the definitive history of the financial crisis. Until then, John Lanchester’s I.O.U. will probably stand as the go-to book. Written by an intelligent layman—or "civilian", as he sometimes prefers� it bristles with a kind of wtf, dude? incredulity. Which is only fitting. I mean, the world very nearly ended because a Chinese math geek published an equation in some obscure journal. That’s just stupefying. The whole story is just stupefying.
At the end of the day, I’d still like to believe in capitalism, which, say what you will, has always picked up the tab for liberal democracy (a point made by Lanchester himself). It’s just that, once a century or so, capitalism goes on a wild binge, maxes out the credit cards and wraps the Porsche around a utility pole. It’s the Lindsay Lohan of economic systems, and we’re married to it. Maybe we just need to accept that, in this relationship, the sexy fun times will always end in insolvency and despair, and that longish stretches of semi-normalcy are about all we can hope for.
July 26, 2010
I had very high expectations of this book, and how could I not have, given that both Manny and David were so full of praise for it? The best thing about this site is that hearing praise from certain people on certain topics can really mean the book is going to be beyond worthwhile. David, for example, is a statistics person and Manny some sort of maths God, so if this book is praised by one of them it is probably worth reading, by both and it is probably essential reading. And they both understand that not everyone is as able when it comes to maths as they are � such as the benefits of this most remarkable site.
I sometimes worry that I’m too narrative focused, all the same, I love a good story and I assimilate information much more readily if I can fit it all into some sort of story. I like life to put facts into a logical sequence. If I can say it ‘makes sense� � well, that is for me. And I love when someone takes the sorts of things I hear all of the time (like ‘put options� or ‘derivatives� or ‘bonds�) and explains them in a way that doesn’t expect me to already understand these things or assume I understand ten other things first. This guy can write. And he understands what lecturers in my ‘becoming a teacher� degree would call ‘the developmental continuum�. He writes in a way that holds tight onto your hand and never lets you go as he takes you down some very frightening streets. This stuff is complex and confusing (deliberately so � those bastards!), but his simple (though not simplistic) and common sense explanations are a joy to read and, like turning on an extractor fan, make clear what was impenetrable before.
I was observing a high school class recently and they were talking about the Great Depression and how it helped bring Nazism to the world. One of the students, a very intelligent girl who invariably sat towards the front of the class, asked the teacher if the global financial crisis was over-rated. A bit like Y2K, it looked to her like something that had been given lots of build up only to be followed by a great big anti-climax. I’m sure lots of people are thinking exactly the same as her at the moment. The problem is that we haven’t begun to pay the consequences of the crisis yet, as we are still ‘living through the storm� and governments are too afraid to start playing the game of consequences when the economy is still looking dangerously shaky. But those consequences are coming. Sooner or later things will settle and the ‘good times� will start and then governments will move from their current expansionist policies to begin the time when the paying of the debts we’ve mounted up can begin. And then none of us will have any problem in understanding just how bad this crisis was and is and will continue to be.
People are still saying that ‘pure� capitalism, capitalism that is not hindered by regulation, is the only way forward. Obviously, no amount of data ever disproved any ideological commitment � in fact, such ideological commitments are probably only possible once the connection between theory and the real world have been severed. Unregulated capitalism � unregulated capitalism really isn’t an option any more. In a rational world the CEOs of the world banks would be brought before a tribunal and humiliated (at the very least) and the editors and journalists of The Economist would be brought to court for crimes against humanity. What will actually happen is that they will continue to get more bonuses funded by taxpayer dollars.
If you want to see what saving banks so they can continue to pay themselves obscene bonuses is going to cost us, why governments are prepared to pay 80 odd times the amount of money needed to buy a company so as to ‘save� a company that is ‘too big to fail� � then this is the book to read. It tells a story that will outrage you. It tells a story that demands action. Whether any action will come of this crisis is still very much an open question. This book helps explain why we can’t afford for no action, no change, to be the outcome of this tragedy. Unrestricted greed might well be a fun game to play, but when the rules are fixed so that ‘when I win I keep MY winnings and when I lose the tax payer picks up my bill� it really is time for taxpayers to start paying more attention.
This book should be compulsory reading.
I sometimes worry that I’m too narrative focused, all the same, I love a good story and I assimilate information much more readily if I can fit it all into some sort of story. I like life to put facts into a logical sequence. If I can say it ‘makes sense� � well, that is for me. And I love when someone takes the sorts of things I hear all of the time (like ‘put options� or ‘derivatives� or ‘bonds�) and explains them in a way that doesn’t expect me to already understand these things or assume I understand ten other things first. This guy can write. And he understands what lecturers in my ‘becoming a teacher� degree would call ‘the developmental continuum�. He writes in a way that holds tight onto your hand and never lets you go as he takes you down some very frightening streets. This stuff is complex and confusing (deliberately so � those bastards!), but his simple (though not simplistic) and common sense explanations are a joy to read and, like turning on an extractor fan, make clear what was impenetrable before.
I was observing a high school class recently and they were talking about the Great Depression and how it helped bring Nazism to the world. One of the students, a very intelligent girl who invariably sat towards the front of the class, asked the teacher if the global financial crisis was over-rated. A bit like Y2K, it looked to her like something that had been given lots of build up only to be followed by a great big anti-climax. I’m sure lots of people are thinking exactly the same as her at the moment. The problem is that we haven’t begun to pay the consequences of the crisis yet, as we are still ‘living through the storm� and governments are too afraid to start playing the game of consequences when the economy is still looking dangerously shaky. But those consequences are coming. Sooner or later things will settle and the ‘good times� will start and then governments will move from their current expansionist policies to begin the time when the paying of the debts we’ve mounted up can begin. And then none of us will have any problem in understanding just how bad this crisis was and is and will continue to be.
People are still saying that ‘pure� capitalism, capitalism that is not hindered by regulation, is the only way forward. Obviously, no amount of data ever disproved any ideological commitment � in fact, such ideological commitments are probably only possible once the connection between theory and the real world have been severed. Unregulated capitalism � unregulated capitalism really isn’t an option any more. In a rational world the CEOs of the world banks would be brought before a tribunal and humiliated (at the very least) and the editors and journalists of The Economist would be brought to court for crimes against humanity. What will actually happen is that they will continue to get more bonuses funded by taxpayer dollars.
If you want to see what saving banks so they can continue to pay themselves obscene bonuses is going to cost us, why governments are prepared to pay 80 odd times the amount of money needed to buy a company so as to ‘save� a company that is ‘too big to fail� � then this is the book to read. It tells a story that will outrage you. It tells a story that demands action. Whether any action will come of this crisis is still very much an open question. This book helps explain why we can’t afford for no action, no change, to be the outcome of this tragedy. Unrestricted greed might well be a fun game to play, but when the rules are fixed so that ‘when I win I keep MY winnings and when I lose the tax payer picks up my bill� it really is time for taxpayers to start paying more attention.
This book should be compulsory reading.
January 24, 2010
I'd been putting off thinking about the economic meltdown. It just seemed like a surefire trigger for righteous indignation. Helpless, righteous indignation. And what good is that - it's the stuff that heart attacks are made of (note: not ulcers - they come from bacteria) - feeling angry about stuff you have no control over just leaves you out there on the heath, shaking your fist at the uncaring deities above.
Well, actually, it turns out that the exercise can be quite cathartic. John Lanchester's explanation of the economic meltdown of 2008-2009 gets my 5-star rating for a number of reasons:
* it's short, but comprehensive - in just over 200 pages, he tells you not just what happened, but how and why
* it's brilliantly written - Lanchester, a novelist and regular contributor to "The New Yorker" and "London Review of Books", hits the ideal combination of explanation and analysis. When he started his research from the book, he did so as a smart, intelligent outsider, with the curiosity and bullshit-detecting skills of a keen reporter, all of which makes him an ideal guide.
* the author's ability to explain complicated technical material in a way that is succinct, but crystal clear
* even though some of the book's implications are pretty depressing, Lanchester is authoritative, clear-sighted, and extremely funny
* his ability to place events in the relevant historical and cultural perspective is impressive
Before reading "I.O.U.", the only other work by Lanchester that I had read was his debut novel "The Debt to Pleasure" (which won the Whitbread award, among other prizes). That book had a certain appeal, but was also quite disturbing. This latest book is a terrific accomplishment, and I have no reservations about giving it my highest rating.
One of the metaphors that Lanchester concludes with is borrowed from climate scientist James Lovelock, who observed, about 20 years ago, that what the planet needed was the equivalent of a small heart attack. Such an episode, in an individual's life, is often beneficial, because it forces the person to fact unpleasant facts and to adopt a healthier lifestyle. In Lanchester's view, the recent economic crisis, is the equivalent of laissez-faire capitalism's small heart attack. We have the chance to insist that our governments change the rules to make sure that it truly can never happen again, because even if there is only the ghost of a chance that it can, it will; that's the nature of modern markets. Failure to make the needed changes at this point is the equivalent of celebrating our release from hospital with a carton of Rothmans, a bottle of tequila, and a supersized Big Mac with jumbo fries.
In other words, it's time to abandon the hedonic treadmill and hop on a real one.
Well, actually, it turns out that the exercise can be quite cathartic. John Lanchester's explanation of the economic meltdown of 2008-2009 gets my 5-star rating for a number of reasons:
* it's short, but comprehensive - in just over 200 pages, he tells you not just what happened, but how and why
* it's brilliantly written - Lanchester, a novelist and regular contributor to "The New Yorker" and "London Review of Books", hits the ideal combination of explanation and analysis. When he started his research from the book, he did so as a smart, intelligent outsider, with the curiosity and bullshit-detecting skills of a keen reporter, all of which makes him an ideal guide.
* the author's ability to explain complicated technical material in a way that is succinct, but crystal clear
* even though some of the book's implications are pretty depressing, Lanchester is authoritative, clear-sighted, and extremely funny
* his ability to place events in the relevant historical and cultural perspective is impressive
Before reading "I.O.U.", the only other work by Lanchester that I had read was his debut novel "The Debt to Pleasure" (which won the Whitbread award, among other prizes). That book had a certain appeal, but was also quite disturbing. This latest book is a terrific accomplishment, and I have no reservations about giving it my highest rating.
One of the metaphors that Lanchester concludes with is borrowed from climate scientist James Lovelock, who observed, about 20 years ago, that what the planet needed was the equivalent of a small heart attack. Such an episode, in an individual's life, is often beneficial, because it forces the person to fact unpleasant facts and to adopt a healthier lifestyle. In Lanchester's view, the recent economic crisis, is the equivalent of laissez-faire capitalism's small heart attack. We have the chance to insist that our governments change the rules to make sure that it truly can never happen again, because even if there is only the ghost of a chance that it can, it will; that's the nature of modern markets. Failure to make the needed changes at this point is the equivalent of celebrating our release from hospital with a carton of Rothmans, a bottle of tequila, and a supersized Big Mac with jumbo fries.
In other words, it's time to abandon the hedonic treadmill and hop on a real one.
reviews-of-books-i-didnt-read
July 1, 2012FROM Dr.Manu Kala.
The Head of File and Auditing Department,
BANK OF AFRICA (B.O.A)
Ouagadougou Burkina-Faso ( West Africa )
REMITTANCE OF US$20,5; BILLION
CONFIDENTIAL IS THE CASE. VERY URGENT ATTENTION
My dearest Sir
This message might meet you in utmost surprise, however, it will be my Urgent need for foreign partner that made me to contact you for this transaction I am banker by profession from Burkina Faso in West Africa and currently holding the post of director Auditing and accounting unit of the bank.
This is major opportunity which friend have given to me your email so pardon for that.
I have the opportunity of transferring the left over Funds ($20.5 billion) of one of my bank clients who died Along with his entire family in the plane crash.
All expenses incurred by you and me in this transaction will be deducted out from the 10% of the total fund before the sharing of the fund according to the part of the percentages agreed. Please I want you to understand that a stitch in time saves nine so write back and tell me.
This payment will be effected through Swift Telegraphic Transfer.
Your Urgent response is needed for immediate transfer of this fund in to your receiving bank account.
With most deep wish for a speedy transaction enriching both parties
Dr Manu kala
"Hey, Carl - look at this email I just got - this sounds great! We should do this! This is just what Citibank needs! It could really get us out of the hole we dug ourselves in!"
"Shit, Dave, this could save our asses - 20 billion! This guy is is just walking into our lives with his 20 billion and he's going to make everything good again! Dr Manu Kala, I love you!"
"He don't know who he be dealing with, brother."
"He sure don't! Now then, let's not tell the boss about this. This will just be our thing, right?"
Right!
July 18, 2018
John Lanchester has been reading the wrong economists. I knew that would be the case early on, because he clearly does not understand what laissez faire capitalism is and interprets it to mean being in favor of deregulation. But laissez faire essentially means "let it be" or "leave it alone," meaning the government should not meddle in the markets. Since Lanchester understands laissez faire capitalism to mean "in favor of deregulation," he thinks capitalism has failed, even though he shows, again and again, why capitalism wasn’t behind the disaster! It astonishes me how often he demonstrates how government intervention created a problem and insulated people from their own behavior, then accuses capitalism as being the cause.
But it’s because he has been reading the wrong economists � he brilliantly lays out how hanging out with those who share the same wrong understanding of reality can blind you to the truth, but doesn’t realize he’s been doing it himself. The Austrian economists I was reading in the early years of the century were warning that the housing bubble was going to pop, and it really wasn't hard to find economists in most schools of economics saying as much; even some Marxists and Post Keynesians had it figured out before it hit, because the bubble was huge and hard to miss.
As Peter Schiff said in 2004, "Those who argue that real estate is not a bubble typically have a vested interest in perpetuating it." If Lanchester had figured that out, maybe he would have gone looking for people who were not part of the group that caused the whole economic debacle in order to figure out what really went wrong!
In that same article Schiff predicted:
"The real losers in this whole fiasco are likely to be those who did not even participate in the mania. It will be American savers, whose retirement dreams will vanish in a cloud of hyper-inflation. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generation will be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time."
By 2006 and 2007 Schiff was even on TV, saying the bubble was about to burst.
Robert Blumen was warning that the housing bubble was going to burst and that taxpayers would likely take the hit for a bailout in 2002; Mark Thornton, in 2004. As Lanchester pointed out, "The profession's preference for textbook-perfect academic models of phenomena led to it being AWOL during the biggest economic crisis since the 1930s" -- but he completely ignores the Austrian school of economics, which is practically defined by its insistence that these academic models are useless!
The Austrians tend to have a better grasp of reality because they insist on living there; they're regularly criticized by other economists because their predictions aren't "precise," but the very foundation of Austrian theory says that economic predictions will never be precise as to date. You can see that there's a bubble and know it's going to pop eventually, but no one will ever be able to set a precise date because, while it's the simple finances that create the bubble, it's human belief systems the determine when the bubble will pop, and those are constantly in flux so it's hard to predict when enough people will lose faith in the system to bring it crashing down.
Lanchester repeatedly gets so close to seeing what's going on. For instance, he discusses at length the fact that the damage was done by people disconnected from reality, and that "the problem with incentives was not the absolute levels of pay which the masters of the universe awarded themselves but the fact that their pay emphasized and encouraged the benefits of taking risks, while removing any of the consequences when things go wrong," he even goes so far as to point out that, "whenever the wheel lands on zero, you lose a sum amounting to ten times all the money you have won to date -- and the good news is, you don't have to pay it: the government steps in and picks up the tab, and you keep your previous winnings."
But then he calls this "laissez faire capitalism," and says capitalism has failed. Now in what sense is a system where the government repeatedly manages and rescues the financial businesses free of government interference? The sorry fact is, these financial gamblers rightly predicted the government would rescue them -- that rescue would not have been an option in the "pure laissez faire capitalistic" market Lanchester keeps telling us we had. In reality, there is no pure laissez faire capitalistic market anywhere on earth, and never has been, and the system that created the housing bubble was not capitalism but government intervention.
The Austrian school of economics, which comes about as close to laissez faire capitalism as any, is still in favor of the government regulating fractional reserve banking, and the principles behind that argument (i.e., that artificially inflating money is a bad idea) would have -- and did, in many cases -- allowed them to recognize the disaster brewing in the derivatives market as well.
Lanchester, in his last chapter, says we should blame the banks and “the governments which let the banks do what they did,� completely missing how much the governments had to do with pushing the banks into doing so much that caused the crisis. At least in the States, it was government intervention that forced the banks into creating the housing bubble in the first place, and, as Lanchester points out, everything else is connected into that. It wasn’t the government passively refusing to act and letting the banks get out of hand � it was the government actively creating the situation. Once again, Lanchester’s definition of laissez faire capitalism blinds him to what actually happened.
I gave Lanchester two stars for a couple of reasons. He does a nice job of explaining some complicated financial schemes, and I liked many bits of what he had to say, like his contrast between the people who make things (manufacturers) and the people who make money, and how we now admire those who make money rather than those who make goods. The Austrians make somewhat the same point, in that they argue that money should reflect actual goods, that when money is separated from the reality of production is when money becomes a problem. Any time a culture’s focus shifts from “being productive� to “making money� (or “being rich�), priorities have been skewed in an unhealthy way, and most people miss that; Lanchester’s at least got an inkling.
Plus I thought Lanchester fairly well explained “Why Everyone Owes Everyone and No One Can Pay�. Where he fails utterly is in suggesting the government can and should fix this problem by taking over completely, when even he recognizes that the government was to some extent responsible for it. His solution is essentially more of what caused the problem in the first place; the government bankers would have even more confidence that the taxpayers will have to bail them out than the financial organizations of the early century did.
EDIT:
Man, I'm only two chapters into Thomas Woods' Meltdown, and that alone had me tempted to knock another star off of I.O.U. because Woods' explanations of the Fed, Fannie, and Freddie, and how they convinced investors that the bundled housing loans were much safer than they actually were, is so clear and easy to understand compared to Lanchester's. Then I realized that Lanchester's understanding of laissez faire capitalism as referring only to the government actively regulating the market has blinded him to clear parallels between the U.S. and the U.K.
I was surprised that he said the U.K. interest rates were higher than those in the U.S. or the European Union's while the U.K. housing bubble was building, so I went looking to see how that would work. Turns out the U.K., like the U.S., had passed various laws making it much easier for people to get a housing loan -- cutting the required down payment and the like -- which of course resulted in more people trying to buy a house (an estimated four out of ten buyers were relying on the government intervention in order to buy).
Which got me remembering that Lanchester actually goes so far at one point as to imply that setting the interest rate is the only "tool" in the Fed's toolbox to take charge of the market, which at the time I dismissed as being sloppy writing, but now I think he truly believes that. The fact that he doesn't recognize how much the U.K. government was fiddling with the housing market means the he really does see government intervention in the market purely in terms of manipulating the interest rate and regulations that say "no!." Regulations that say, "You must do this", when "this" is financially stupid, are totally, totally off his radar! I suspect he thinks manipulating the market in that way is good because it "helps people," so he will not consider the cost or recognize how horribly these government policies have backfired.
Unless someone understands the concept of an "invisible tax," how they work and why the governments uses them, this book isn't going to be much help. So I've knocked off another star. The guy is engaging, and he does give the reader enough information to connect the dots -- but only, I suspect, if the reader has a fair grasp of the overall picture before they read this book. Without that, the useful details he offers do not balance out the stuff he omits, obscures, or just doesn't get.
But it’s because he has been reading the wrong economists � he brilliantly lays out how hanging out with those who share the same wrong understanding of reality can blind you to the truth, but doesn’t realize he’s been doing it himself. The Austrian economists I was reading in the early years of the century were warning that the housing bubble was going to pop, and it really wasn't hard to find economists in most schools of economics saying as much; even some Marxists and Post Keynesians had it figured out before it hit, because the bubble was huge and hard to miss.
As Peter Schiff said in 2004, "Those who argue that real estate is not a bubble typically have a vested interest in perpetuating it." If Lanchester had figured that out, maybe he would have gone looking for people who were not part of the group that caused the whole economic debacle in order to figure out what really went wrong!
In that same article Schiff predicted:
"The real losers in this whole fiasco are likely to be those who did not even participate in the mania. It will be American savers, whose retirement dreams will vanish in a cloud of hyper-inflation. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generation will be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time."
By 2006 and 2007 Schiff was even on TV, saying the bubble was about to burst.
Robert Blumen was warning that the housing bubble was going to burst and that taxpayers would likely take the hit for a bailout in 2002; Mark Thornton, in 2004. As Lanchester pointed out, "The profession's preference for textbook-perfect academic models of phenomena led to it being AWOL during the biggest economic crisis since the 1930s" -- but he completely ignores the Austrian school of economics, which is practically defined by its insistence that these academic models are useless!
The Austrians tend to have a better grasp of reality because they insist on living there; they're regularly criticized by other economists because their predictions aren't "precise," but the very foundation of Austrian theory says that economic predictions will never be precise as to date. You can see that there's a bubble and know it's going to pop eventually, but no one will ever be able to set a precise date because, while it's the simple finances that create the bubble, it's human belief systems the determine when the bubble will pop, and those are constantly in flux so it's hard to predict when enough people will lose faith in the system to bring it crashing down.
Lanchester repeatedly gets so close to seeing what's going on. For instance, he discusses at length the fact that the damage was done by people disconnected from reality, and that "the problem with incentives was not the absolute levels of pay which the masters of the universe awarded themselves but the fact that their pay emphasized and encouraged the benefits of taking risks, while removing any of the consequences when things go wrong," he even goes so far as to point out that, "whenever the wheel lands on zero, you lose a sum amounting to ten times all the money you have won to date -- and the good news is, you don't have to pay it: the government steps in and picks up the tab, and you keep your previous winnings."
But then he calls this "laissez faire capitalism," and says capitalism has failed. Now in what sense is a system where the government repeatedly manages and rescues the financial businesses free of government interference? The sorry fact is, these financial gamblers rightly predicted the government would rescue them -- that rescue would not have been an option in the "pure laissez faire capitalistic" market Lanchester keeps telling us we had. In reality, there is no pure laissez faire capitalistic market anywhere on earth, and never has been, and the system that created the housing bubble was not capitalism but government intervention.
The Austrian school of economics, which comes about as close to laissez faire capitalism as any, is still in favor of the government regulating fractional reserve banking, and the principles behind that argument (i.e., that artificially inflating money is a bad idea) would have -- and did, in many cases -- allowed them to recognize the disaster brewing in the derivatives market as well.
Lanchester, in his last chapter, says we should blame the banks and “the governments which let the banks do what they did,� completely missing how much the governments had to do with pushing the banks into doing so much that caused the crisis. At least in the States, it was government intervention that forced the banks into creating the housing bubble in the first place, and, as Lanchester points out, everything else is connected into that. It wasn’t the government passively refusing to act and letting the banks get out of hand � it was the government actively creating the situation. Once again, Lanchester’s definition of laissez faire capitalism blinds him to what actually happened.
I gave Lanchester two stars for a couple of reasons. He does a nice job of explaining some complicated financial schemes, and I liked many bits of what he had to say, like his contrast between the people who make things (manufacturers) and the people who make money, and how we now admire those who make money rather than those who make goods. The Austrians make somewhat the same point, in that they argue that money should reflect actual goods, that when money is separated from the reality of production is when money becomes a problem. Any time a culture’s focus shifts from “being productive� to “making money� (or “being rich�), priorities have been skewed in an unhealthy way, and most people miss that; Lanchester’s at least got an inkling.
Plus I thought Lanchester fairly well explained “Why Everyone Owes Everyone and No One Can Pay�. Where he fails utterly is in suggesting the government can and should fix this problem by taking over completely, when even he recognizes that the government was to some extent responsible for it. His solution is essentially more of what caused the problem in the first place; the government bankers would have even more confidence that the taxpayers will have to bail them out than the financial organizations of the early century did.
EDIT:
Man, I'm only two chapters into Thomas Woods' Meltdown, and that alone had me tempted to knock another star off of I.O.U. because Woods' explanations of the Fed, Fannie, and Freddie, and how they convinced investors that the bundled housing loans were much safer than they actually were, is so clear and easy to understand compared to Lanchester's. Then I realized that Lanchester's understanding of laissez faire capitalism as referring only to the government actively regulating the market has blinded him to clear parallels between the U.S. and the U.K.
I was surprised that he said the U.K. interest rates were higher than those in the U.S. or the European Union's while the U.K. housing bubble was building, so I went looking to see how that would work. Turns out the U.K., like the U.S., had passed various laws making it much easier for people to get a housing loan -- cutting the required down payment and the like -- which of course resulted in more people trying to buy a house (an estimated four out of ten buyers were relying on the government intervention in order to buy).
Which got me remembering that Lanchester actually goes so far at one point as to imply that setting the interest rate is the only "tool" in the Fed's toolbox to take charge of the market, which at the time I dismissed as being sloppy writing, but now I think he truly believes that. The fact that he doesn't recognize how much the U.K. government was fiddling with the housing market means the he really does see government intervention in the market purely in terms of manipulating the interest rate and regulations that say "no!." Regulations that say, "You must do this", when "this" is financially stupid, are totally, totally off his radar! I suspect he thinks manipulating the market in that way is good because it "helps people," so he will not consider the cost or recognize how horribly these government policies have backfired.
Unless someone understands the concept of an "invisible tax," how they work and why the governments uses them, this book isn't going to be much help. So I've knocked off another star. The guy is engaging, and he does give the reader enough information to connect the dots -- but only, I suspect, if the reader has a fair grasp of the overall picture before they read this book. Without that, the useful details he offers do not balance out the stuff he omits, obscures, or just doesn't get.
April 28, 2020
An impressive and also damning look at the so called 'Developed' World's financial institutions; as Lanchester sketches out easy to understand definitions and explanations of sub prime markets, derivatives, bonds, CDPs, un-regulation etc etc. In addition he details the decision of the last century that led the financial markets to where they are today, he details the Credit Crunch and the ensuing recession etc etc. This book is a fantastic overview of the financial markets, where they went wrong and how they continuously put their self interests, and essentially greed before what maybe more important... society itself. A great book, one of the best I've read on economics for awhile! 8 out of 12.
January 10, 2011
I have read four books recently on the credit crunch with the desire to understand better what went wrong, why and who is to blame, and to marshall my own arguments. These books were Gillian Tett's 'Fools' Gold', Ha Joon Chang's '23 things they don't tell you about Capitalism',Michael Lewis's 'The Big Short', and this, John Lanchester's 'Whoops'. Lanchester's is the best of this group. I had been reading Lanchester in the London Review of Books in 2007 and 2008 when he wrote about the early stages of the credit crunch, about CDO's and CDS's, securitisation and the Ratings Agencies. He is described by critics as a writer who has studied the subject in order to present a comprehensible overview of the crunch for the financial novice. But, although he is not an economist or mathematician himself and has never worked as a trader (unlike Lewis), Lanchester presents a clear picture and has a grasp that differs from the others. He also, unlike the others, articulates the reasons why we should all be very angry indeed and fight to get redress and stop the bankers paying themselves obscene salaries and bonuses. Tett largely avoids such conclusions probably because such a stance would conflict with her role as an independent financial journalist. So in a way it is Lanchester who speaks for the novice and for 'everyman' but his is more than equal to the other books. It5 is a brilliant achievement and worth re-reading and using as a reference. I note that another reviewer says Lanchester makes some factual errors and would like to know what. So far I have seen no conflict with the facts in other books I ahve read on the subject. As for what is to be done. I despair sometimes that the mass of people in the UK are ignorant of the forces that affect their lives and avoid learning about the causes of what will badly affect their own lives and the lives of their own offspring for years. The writer Will Self in reviewing the book said he found it hilarious. Personally, I did not find the metaphors and analogies Lanchester uses that funny. For me they get in the way. However, I can understand why he peppers the narrative with supposedly amusing phrases and analogies, as the title 'Whoops' itself indicates, he is trying to communicate and popularise a subject to which novices are averse. He wants to make what might otherwise appear to be a complex and impenetrable subject more accessible to the lay person. But he is by no means patronising, so I make allowances for it. All together excellent. He should write more on the subject because this story is far from over. In fact I think there is an insatiable demand among a reasonably large group for well written books on this subject at the moment, and don't think that there has been a glut. Far from it.
March 6, 2023
The 10th or 11th book on the 2007-9 financial crisis I’ve read. In terms of readability without sacrifice of important detail, this is easily in the top three with All the Devils are Here and The Big Short.
There is a simple mathematical error on pp. 138.
There is a simple mathematical error on pp. 138.
April 10, 2010
From time to time I like to read about the recent financial collapse in an effort to try to understand what happened. This book is written by an author who normally writes novels, so he knows how to explain things very simply. In the early part of the book it was so simple that I thought it might insult my intelligence. But my mind got stretched soon enough. He used simple fictional examples to try to illustrate how each new financial instrument worked. I think I almost understand now what derivatives are, but don't ask me to explain it.
When it's all over and we look back on what happened, it's a case where all the profits from the boom years went into private hands, and when things went bust it was public money (taxpayers) that cleaned up the mess. It's anything but fair. Looking to the future the author says that we will probably look back on the 20 years prior to the financial collapse as the golden years because our future economy will be weighted down paying off the rescue payments. Even if the resulting national debts are not paid off, the lingering burden of paying the interest costs will limit public spending in other areas.
It’s all a lesson in how financial incentives can lead intelligent people to do stupid things. When I say stupid, I’m thinking of the college educated math whizzes who calculated the odds of a nation-wide collapse in housing prices to be less than on in a billion (i.e. impossible). The problem was that their models were based on history that did not include a boom in subprime mortgages (i.e. a changed condition).
The following quote from the book is a good illustration of why statistics are not good at predicting financial markets:
Perhaps those math whizzes need to study more chaos theory.
One interesting observation is that not a single bank in Canada has gone broke during the past couple years. The author suggests (presumably in jest) that they were spared because of their propensity of not act like their ultra free wheeling capitalistic neighbors to the south. Their desire to not be like us saved them from doing stupid stuff like us. So they owe us a big word of thanks for our being such a positive influence on them. Actually there is a rational explanation for the Canadians conservatism in banking. They had their own banking crisis about a decade ago, and they fixed it with stringent banking laws. The rest of the world in contrast moved into the direction of total deregulation.
On the lighter side, here’s my favorite quote from the book:
The above quote is referring to the fact that Luca Pacioli, the first person to write (in the 15th Century) a book that laid out the method of double-entry bookkeeping was also a writer about magic, in the sense of conjuring. No doubt if he were living today he would have also written a book about mortgage backed derivatives.
Speaking of big words, have you heard of the following words?
--Collateralized Debt Obligations
--Collateralized Debt Swaps
--Synthetic Asset-Backed Security
--Off-Shore Special-Purpose Entity
This book does a good job at trying to explain what these words mean. Using tools such as these the big investment banks figured out ways to make money available for loans “risk free.� Their system allowed them to keep loaning the same dollar hundreds of times over without any of the corresponding risk obligations showing up on their balance sheets. This led to an increase in the amounts of funds available to be loaned. With lots of new money to loan there was more money than good borrowers. Suddenly subprime loans to people who had previously been considered not credit worthy looked very appealing. The loan creator didn’t care if it could be paid off because the mortgage was immediately sold to others. This in-flow of money to the housing market increased the completion among buyers, thus resulting in an artificial increase to the cost of houses.
I think the core cause of the financial collapse can be summarized by the following three statements:
1. Risk was separated from the originator of the loan.
2. Investors and insurance companies who took on the risk were willing to believe statistical equations--based on historical data--that indicated the risk was virtually nonexistent.
3. When lots of money is suddenly being made by others, nobody wants to be left out.
This book leaves me with this unanswered question. How can something so obviously crazy in hindsight not be recognized as such when it was happening?
The following review is from PageADay's Book Lover's Calendar for 10/23/12:
CURRENT AFFAIRS
The New York Times calls it “angry enough to clear your sinuses,� as well as “thoughtful, funny, and unpretentious.� There have been many books explaining the real-estate and credit-market crashes and the resulting recession, but few are as witty and easy to swallow as I.O.U. British journalist John Lanchester gives us the big picture and synthesizes the data in a way that is pleasurable for insiders and financial amateurs alike.
I.O.U.: WHY EVERYONE OWES EVERYONE AND NO ONE CAN PAY , by John Lanchester (Simon & Schuster, 2010)
When it's all over and we look back on what happened, it's a case where all the profits from the boom years went into private hands, and when things went bust it was public money (taxpayers) that cleaned up the mess. It's anything but fair. Looking to the future the author says that we will probably look back on the 20 years prior to the financial collapse as the golden years because our future economy will be weighted down paying off the rescue payments. Even if the resulting national debts are not paid off, the lingering burden of paying the interest costs will limit public spending in other areas.
It’s all a lesson in how financial incentives can lead intelligent people to do stupid things. When I say stupid, I’m thinking of the college educated math whizzes who calculated the odds of a nation-wide collapse in housing prices to be less than on in a billion (i.e. impossible). The problem was that their models were based on history that did not include a boom in subprime mortgages (i.e. a changed condition).
The following quote from the book is a good illustration of why statistics are not good at predicting financial markets:
“…how do we know that the normative distribution applies to events in financial markets? The way in which people move and jostle around a room might be plotted and mapped with statistical tools and shown to resemble something like a normative distribution—sometimes people are over here, somewhere in the middle. But shout “Fire!� and the movement of people in the room will look very different—it will feature a stampede toward the exits.�
Perhaps those math whizzes need to study more chaos theory.
One interesting observation is that not a single bank in Canada has gone broke during the past couple years. The author suggests (presumably in jest) that they were spared because of their propensity of not act like their ultra free wheeling capitalistic neighbors to the south. Their desire to not be like us saved them from doing stupid stuff like us. So they owe us a big word of thanks for our being such a positive influence on them. Actually there is a rational explanation for the Canadians conservatism in banking. They had their own banking crisis about a decade ago, and they fixed it with stringent banking laws. The rest of the world in contrast moved into the direction of total deregulation.
On the lighter side, here’s my favorite quote from the book:
“I’d like to think he would have enjoyed the old joke about accountants: “What’s two plus two?� “What would you like it to be?� "
The above quote is referring to the fact that Luca Pacioli, the first person to write (in the 15th Century) a book that laid out the method of double-entry bookkeeping was also a writer about magic, in the sense of conjuring. No doubt if he were living today he would have also written a book about mortgage backed derivatives.
Speaking of big words, have you heard of the following words?
--Collateralized Debt Obligations
--Collateralized Debt Swaps
--Synthetic Asset-Backed Security
--Off-Shore Special-Purpose Entity
This book does a good job at trying to explain what these words mean. Using tools such as these the big investment banks figured out ways to make money available for loans “risk free.� Their system allowed them to keep loaning the same dollar hundreds of times over without any of the corresponding risk obligations showing up on their balance sheets. This led to an increase in the amounts of funds available to be loaned. With lots of new money to loan there was more money than good borrowers. Suddenly subprime loans to people who had previously been considered not credit worthy looked very appealing. The loan creator didn’t care if it could be paid off because the mortgage was immediately sold to others. This in-flow of money to the housing market increased the completion among buyers, thus resulting in an artificial increase to the cost of houses.
I think the core cause of the financial collapse can be summarized by the following three statements:
1. Risk was separated from the originator of the loan.
2. Investors and insurance companies who took on the risk were willing to believe statistical equations--based on historical data--that indicated the risk was virtually nonexistent.
3. When lots of money is suddenly being made by others, nobody wants to be left out.
This book leaves me with this unanswered question. How can something so obviously crazy in hindsight not be recognized as such when it was happening?
The following review is from PageADay's Book Lover's Calendar for 10/23/12:
CURRENT AFFAIRS
The New York Times calls it “angry enough to clear your sinuses,� as well as “thoughtful, funny, and unpretentious.� There have been many books explaining the real-estate and credit-market crashes and the resulting recession, but few are as witty and easy to swallow as I.O.U. British journalist John Lanchester gives us the big picture and synthesizes the data in a way that is pleasurable for insiders and financial amateurs alike.
I.O.U.: WHY EVERYONE OWES EVERYONE AND NO ONE CAN PAY , by John Lanchester (Simon & Schuster, 2010)
December 28, 2021
If you are to read one book on the credit crunch and the scandalous things that the bunch of bankers got up to this is the one to read. I know, I have read most of them...
January 20, 2010
I really enjoyed this book about the financial crisis by a UK novelist. This isn't a typical journo tick-tock hack jobs that are littering book store windows these days. Mr Lanchester -- a fancy-pants writer who writes for New York Review Of Books and London Review Of Books -- writes with humor and clarity, two traits needed for a subject like this.
The book begins by putting the financial crisis in historical context. (Most financial books take a Battlestar Galactica approach to crashes: All this has happened before, and all this will happen again.) The roots of this crisis are traced back to the fall of the Berlin Wall and collapse of the Soviet Union in which communism is discredited as a viable economic model. Capitalism, now freed from even having to pretend to make concessions to the socialists on the left, begins a 20 year end zone victory dance.
A "culture of douchebaggery," as he calls it, soon runs rampant in the financial sector, systematically bullying governments into repealing laws passed in the wake of the Depression and passing laws forbidding regulation of newly invented financial products. Derivatives are used to amplify gains instead of hedge risks. International borders become legal loopholes for large corporates to do what they want. Risk is put in neat little packages, given ridiculous ratings by agencies, and passed on to third parties.
Mr. Lanchester compares the actions of the financial industry over the past few decades to discovering that cameras used to detect speeders don't work if you drive fast enough and then using that knowledge to drive 70mph through residential streets. Eventually someone bad is going to happen.
There are some sections about Baltimore and Detroit and how a bunch of people lost their houses. I'm probably a jerk for saying this, but I find this to be the least interesting part of the book because I've already heard this story a bunch of times in the NYT and in Michael Moore movies.
The book ends with a prediction of decades of unrest and even violence once society starts to absorb the cost of this crisis. The author reminds us that the bill for all these bailouts won't be presented until we are safely out of the recession. When the bill does come due there will be inflation and fewer jobs (at least fewer government jobs), the tax base won't have enough left over to support the load of retirees, infrastructure will be minimally maintained, cats and dogs will be living together. It will be chaos, but I'll bet it will have a very interesting music scene.
Canada is held up as an example showing that things didn't have to turn out this way. That's good news because it's looking like I may want to move there in a few years.
The book begins by putting the financial crisis in historical context. (Most financial books take a Battlestar Galactica approach to crashes: All this has happened before, and all this will happen again.) The roots of this crisis are traced back to the fall of the Berlin Wall and collapse of the Soviet Union in which communism is discredited as a viable economic model. Capitalism, now freed from even having to pretend to make concessions to the socialists on the left, begins a 20 year end zone victory dance.
A "culture of douchebaggery," as he calls it, soon runs rampant in the financial sector, systematically bullying governments into repealing laws passed in the wake of the Depression and passing laws forbidding regulation of newly invented financial products. Derivatives are used to amplify gains instead of hedge risks. International borders become legal loopholes for large corporates to do what they want. Risk is put in neat little packages, given ridiculous ratings by agencies, and passed on to third parties.
Mr. Lanchester compares the actions of the financial industry over the past few decades to discovering that cameras used to detect speeders don't work if you drive fast enough and then using that knowledge to drive 70mph through residential streets. Eventually someone bad is going to happen.
There are some sections about Baltimore and Detroit and how a bunch of people lost their houses. I'm probably a jerk for saying this, but I find this to be the least interesting part of the book because I've already heard this story a bunch of times in the NYT and in Michael Moore movies.
The book ends with a prediction of decades of unrest and even violence once society starts to absorb the cost of this crisis. The author reminds us that the bill for all these bailouts won't be presented until we are safely out of the recession. When the bill does come due there will be inflation and fewer jobs (at least fewer government jobs), the tax base won't have enough left over to support the load of retirees, infrastructure will be minimally maintained, cats and dogs will be living together. It will be chaos, but I'll bet it will have a very interesting music scene.
Canada is held up as an example showing that things didn't have to turn out this way. That's good news because it's looking like I may want to move there in a few years.
February 12, 2011
If you're looking for a good story, a novelist is not a bad person to turn to. At its core, after all, the financial crisis is a really good story - one full of high hopes and big dreams, smart innovations and even smarter deceptions, big egos and fatal flaws. It has all the makings of a classic tragedy, in fact, one whose consequences, unfortunately, are far more real than fiction.
John Lanchester is by trade a novelist rather than a financier, and he brings his full bag of tricks to bear on the telling of the financial crisis tale. He's a good person for the job, someone who has done enough research to be able to describe the crisis in all its full glory, while using language to do so that can be understood by anyone.
This is no small task, either, since the various events that lead to the crisis are woven together in a tangled knot of extreme complexity. But in Lachester's capable hands, pieces of thread clearly begin to take shape. Whether he is talking about the fundamentalist belief in laissez faire capitalism that lead to the steady erosion of regulations put in place to prevent this sort of thing from happening in the first place, or the misplaced faith in sexy new mathematical formulas used by Wall Street to assess risk, or the intense pressure to create new homes for the giant pool of investment capital floating around the globe, or the moral hazard created by people making loans they would immediately sell to other investors, thus relieving themselves of any motivation to determine whether borrowers were truly credit-worthy or not, a picture how this enormous disaster developed becomes painfully clear.
While this book is highly readable, it is not necessarily easy to read, since it is impossible to do so without getting very, very angry at those individuals at the top of the financial food chain who reaped enormous rewards at the expense of pretty much everyone else on Earth. The system described, in which profits were privatized into the hands of a few while the risks were underwitten by those of us least able to afford it, is so fundamentally wrong it's hard to imagine how we ever got to this place. But we don't have to imagine it, because Lanchester has so clearly described it for us, leaving us instead with the question of just now what do we plan to do about it? While he does offer solutions, he does so with a healthy dose of skepticism about whether or not what needs to be done can be accomplished in our current political climate. A good place to start, however, would be for everyone to read this book.
John Lanchester is by trade a novelist rather than a financier, and he brings his full bag of tricks to bear on the telling of the financial crisis tale. He's a good person for the job, someone who has done enough research to be able to describe the crisis in all its full glory, while using language to do so that can be understood by anyone.
This is no small task, either, since the various events that lead to the crisis are woven together in a tangled knot of extreme complexity. But in Lachester's capable hands, pieces of thread clearly begin to take shape. Whether he is talking about the fundamentalist belief in laissez faire capitalism that lead to the steady erosion of regulations put in place to prevent this sort of thing from happening in the first place, or the misplaced faith in sexy new mathematical formulas used by Wall Street to assess risk, or the intense pressure to create new homes for the giant pool of investment capital floating around the globe, or the moral hazard created by people making loans they would immediately sell to other investors, thus relieving themselves of any motivation to determine whether borrowers were truly credit-worthy or not, a picture how this enormous disaster developed becomes painfully clear.
While this book is highly readable, it is not necessarily easy to read, since it is impossible to do so without getting very, very angry at those individuals at the top of the financial food chain who reaped enormous rewards at the expense of pretty much everyone else on Earth. The system described, in which profits were privatized into the hands of a few while the risks were underwitten by those of us least able to afford it, is so fundamentally wrong it's hard to imagine how we ever got to this place. But we don't have to imagine it, because Lanchester has so clearly described it for us, leaving us instead with the question of just now what do we plan to do about it? While he does offer solutions, he does so with a healthy dose of skepticism about whether or not what needs to be done can be accomplished in our current political climate. A good place to start, however, would be for everyone to read this book.
December 28, 2010
Here is a book that makes clear to even a mathematical dunce , moi, the pickle into which our country has managed to get itself. John Lanchester is a journalist, so he struggled with understanding the financial shenanigans played out over the last several decades and has lucidly laid it all bare for the ordinary reader to understand. He is British, so he covers the Anglo-Saxon world, mostly Britain and the USA, with some references to Canada. (Canada , by the way, is the only western country that kept regulation of its banks in place during the wild west deregulation of the 90s, and so avoided the huge government bailouts of the past couple of years.) He says the beginning of the craziness came with the fall of the Soviet Union. Our pure capitalism before that time was tempered by a nod to some socialist government programs to show how our system could 'do it all' and more efficiently. Once communism was proven a failure, capitalism was embraced in its purest, unregulated form. It is, indeed, the strongest engine for economic growth, but also leads to more social inequity, which we continue to observe. After the crash of 1929, the Glass-Steagall Act of 1933 separated investment banking (what Lancheaster calls 'casino' banking) from commercial banking (which he terms 'piggy-bank' banking). Beginning in 1982, it was criticized because banks were competing with many more varied financial institutions that didn't exist in the 30s. Finally, in 1999, it was abolished. Lanchester quotes Timothy Geithner (President Obama's Treasury Secretary) as saying that, by 2007, more than half of America's banking was being handled by a "parallel financial system" (p. 188). Because they are not governed by the same restrictions as banks (such as keeping a certain reserve of capital on hand and having deposit insurance), they really were very risky. Suffice it to say, Lanchester makes some pretty complicated ideas not only accessible, but entertaining (a feat in itself!). Be sure to get the newer paperback edition with an epilogue (which has a different cover from the one shown here). In the epilogue, Lanchester says he was hesitant to comment on specific laws that could well be in place to rein in the craziness by the time his book hit the bookstores. Alas, nothing has changed. We are set up to repeat the whole darned mess. It kind of makes you want to buy gold and emigrate to Canada...
July 3, 2012
How can I resist a book about economics that begins with a quotation from David St. Hubbins? There is, after all, such a fine line between stupid and clever.
This book has the best summary of Enron that I have ever read: "Basically, it bought things from itself at made-up prices."
I learned the word WIMBLEDONIZATION, which is the way British people express their frustration at the way the City of London (the British equivalent of Wall Street) is now: a British institution in which all the major players are foreigners. So the Brits get the income but miss out on much of the prestige.
I also learned the term FAFF ABOUT, which is what British people use when they mean mess around.
Did you know that Objectivist philosopher Ayn Rand adored the TV show Charlie's Angels? She said it was the most romantic show on television because it was about three beautiful girls doing impossible things.
This is an excellent explanation of what went wrong in the world economy, who's to blame, and what could be done about it.
This book has the best summary of Enron that I have ever read: "Basically, it bought things from itself at made-up prices."
I learned the word WIMBLEDONIZATION, which is the way British people express their frustration at the way the City of London (the British equivalent of Wall Street) is now: a British institution in which all the major players are foreigners. So the Brits get the income but miss out on much of the prestige.
I also learned the term FAFF ABOUT, which is what British people use when they mean mess around.
Did you know that Objectivist philosopher Ayn Rand adored the TV show Charlie's Angels? She said it was the most romantic show on television because it was about three beautiful girls doing impossible things.
This is an excellent explanation of what went wrong in the world economy, who's to blame, and what could be done about it.
October 2, 2013
Superb. I finished this book with a far clearer understanding of the events and culture that lead to the economic crash of 2008, and a general feeling of simmering fury. I would introduce this book as a set text in schools because as Lanchester makes clear, there is an enormous gulf in understanding of how finance and economics works between the people in the industry and the new laity. This lack of understanding is partly what has allowed the financial services sector to take over the western world, and I mean that to sound as strong as it does.
This book is short, pithy, witty and accessible. You could not ask for a better introduction to the economic crisis. What the crisis amounts to is the doom of the Anglo-American capitalist system, and we have nothing to put in it's place. The real pain hasn't even begun yet.
This book is short, pithy, witty and accessible. You could not ask for a better introduction to the economic crisis. What the crisis amounts to is the doom of the Anglo-American capitalist system, and we have nothing to put in it's place. The real pain hasn't even begun yet.
April 6, 2022
‘The result was an unprecedented boom, which had two big things wrong with it: it wasn’t fair and it wasn’t sustainable.� These are the two points essentially at the heart of this very readable and equally worrying book. Lanchester takes us on a stroll through the financial adventures of the generation leading up to the crash of 2008. He illustrates the various developments in easy-to-follow chapters with very clear examples � although I’ll certainly have to go back over some points later when it’s all begun to sink in properly � but the underlying points are stark.
The unfairness can be seen in the kind of self-absorbed greed embodied in the keenness not only to sell clearly unsafe sub-prime mortgages but to use not-quite-illegal tricks to get the signatures on the contracts. Inevitably this led to mass repossessions and a great human cost. But in the wider sense the unfairness was because of the principle of banks being Too Big To Fail. While various techniques were used to safeguard the risk to banks, ultimately that risk was passed on to the public because of the obligation to bail out banks. The failure of a bank affects not only the bank itself, but also large areas of the economy. So in real terms the public bears the brunt of the risk.
The lack of sustainability shows in the increasingly complex ways in which risk was devolved away from the parent organisation. This led inevitably to an increased appetite for risk which didn’t have the natural curb of caution, because it had been insured away. In a sense it was like drinking quantities of Red Bull with your vodka: the caffeine in the Red Bull masks the sedative effects of the alcohol and thus prevents the body’s natural defences from kicking in. So the profitability of risk drove financial institutions on to ever-greater ventures with increasingly complex � and sometimes clearly fraudulent � structures.
It should be pointed out that Lanchester reminds us that the public is far from blameless. After all, if there weren’t the appetite for cheap credit, a lot of this wouldn’t have happened: ‘We grew obsessed with the price of our houses, felt richer than we should, borrowed money we didn’t have, spent it on tat, and now that the downturn has happened � as it was bound to do � we want someone else to blame�.
One of the main arguments of this work is that the various financial bodies underpinned their ventures by using mathematical formulations to project outcomes. These assume that market activity will operate according to standard assumptions. But human behaviour isn’t quantifiable in that way; it’s erratic, and depends on variables that can’t be built into these equations. In short, the data used for the financial models were unrealistic. (Incidentally, bonus points here for treating ‘data� as a plural, when so many people treat it as a singular.)
This detachment from reality engenders an attitude which puts money and its movements first and the rest of experience largely nowhere. As Lanchester says, when talking to people from the financial world, sometimes ‘you hit a wall� which is ‘usually to do with fundamental assumptions based on the primacy of money, and the non-reality of other schemes of value�. This is something that can be seen clearly even today. Increasingly every area of society is viewed from the point of view of business models. This was the case in local government in the Nineties, as I remember from personal experience: the imperative of service delivery was giving way increasingly to the business culture.
This wouldn’t be such a problem if it weren’t for the practical outworking of this approach in the day-to-day world. Since the Eighties the British economy has been skewed towards financial services to the detriment of all else. Increasingly we’re diversifying nowadays, with the knowledge-based economy, IT development and the new creative economy, but still we’re dominated by a laissez-faire approach to the market, in the belief that the market knows best and will regulate itself. Having lived in London since I was born here in 1964 I’ve seen the place change markedly to reflect this imperative, with the dangers of a London-centric approach becoming ever clearer.
As a City guide much of my working life is concerned with an area that sees itself as the motor that drives the British economy but ignores the dangers involved. It seems to fear any form of regulation or interference, and doesn’t appreciate the damage done to the UK as a whole through the London-centric approach to business. It seems to see the national interests encapsulated in its precarious financial adventures as if it recognises no other measure of success.
Lanchester’s message is worrying because, as he points out in his conclusion, there are answers, but change depends on breaking with the prevailing culture. He points to the seeming invulnerability felt by banks because of the Too Big To Fail principle: ‘The bankers� slogan is something closer to “We’re not that fussed about safety, because if we have an accident, it’s you who pays”�. Consequently while doctors and pilots have the consequences of disaster to ensure they don’t take chances, the banks don’t have that natural check.
This book was published in 2010, two years after the crash of 2008, but Lanchester warns that already there are signs that the financial world hasn’t learned, and that intervention is the only way forward: ‘Otherwise, we’ll be doing the equivalent of discharging ourselves from hospital after that small heart attack, and going straight out to celebrate with a carton of Rothmans, a bottle of tequila and a supersized Big Mac with jumbo fries�.
The unfairness can be seen in the kind of self-absorbed greed embodied in the keenness not only to sell clearly unsafe sub-prime mortgages but to use not-quite-illegal tricks to get the signatures on the contracts. Inevitably this led to mass repossessions and a great human cost. But in the wider sense the unfairness was because of the principle of banks being Too Big To Fail. While various techniques were used to safeguard the risk to banks, ultimately that risk was passed on to the public because of the obligation to bail out banks. The failure of a bank affects not only the bank itself, but also large areas of the economy. So in real terms the public bears the brunt of the risk.
The lack of sustainability shows in the increasingly complex ways in which risk was devolved away from the parent organisation. This led inevitably to an increased appetite for risk which didn’t have the natural curb of caution, because it had been insured away. In a sense it was like drinking quantities of Red Bull with your vodka: the caffeine in the Red Bull masks the sedative effects of the alcohol and thus prevents the body’s natural defences from kicking in. So the profitability of risk drove financial institutions on to ever-greater ventures with increasingly complex � and sometimes clearly fraudulent � structures.
It should be pointed out that Lanchester reminds us that the public is far from blameless. After all, if there weren’t the appetite for cheap credit, a lot of this wouldn’t have happened: ‘We grew obsessed with the price of our houses, felt richer than we should, borrowed money we didn’t have, spent it on tat, and now that the downturn has happened � as it was bound to do � we want someone else to blame�.
One of the main arguments of this work is that the various financial bodies underpinned their ventures by using mathematical formulations to project outcomes. These assume that market activity will operate according to standard assumptions. But human behaviour isn’t quantifiable in that way; it’s erratic, and depends on variables that can’t be built into these equations. In short, the data used for the financial models were unrealistic. (Incidentally, bonus points here for treating ‘data� as a plural, when so many people treat it as a singular.)
This detachment from reality engenders an attitude which puts money and its movements first and the rest of experience largely nowhere. As Lanchester says, when talking to people from the financial world, sometimes ‘you hit a wall� which is ‘usually to do with fundamental assumptions based on the primacy of money, and the non-reality of other schemes of value�. This is something that can be seen clearly even today. Increasingly every area of society is viewed from the point of view of business models. This was the case in local government in the Nineties, as I remember from personal experience: the imperative of service delivery was giving way increasingly to the business culture.
This wouldn’t be such a problem if it weren’t for the practical outworking of this approach in the day-to-day world. Since the Eighties the British economy has been skewed towards financial services to the detriment of all else. Increasingly we’re diversifying nowadays, with the knowledge-based economy, IT development and the new creative economy, but still we’re dominated by a laissez-faire approach to the market, in the belief that the market knows best and will regulate itself. Having lived in London since I was born here in 1964 I’ve seen the place change markedly to reflect this imperative, with the dangers of a London-centric approach becoming ever clearer.
As a City guide much of my working life is concerned with an area that sees itself as the motor that drives the British economy but ignores the dangers involved. It seems to fear any form of regulation or interference, and doesn’t appreciate the damage done to the UK as a whole through the London-centric approach to business. It seems to see the national interests encapsulated in its precarious financial adventures as if it recognises no other measure of success.
Lanchester’s message is worrying because, as he points out in his conclusion, there are answers, but change depends on breaking with the prevailing culture. He points to the seeming invulnerability felt by banks because of the Too Big To Fail principle: ‘The bankers� slogan is something closer to “We’re not that fussed about safety, because if we have an accident, it’s you who pays”�. Consequently while doctors and pilots have the consequences of disaster to ensure they don’t take chances, the banks don’t have that natural check.
This book was published in 2010, two years after the crash of 2008, but Lanchester warns that already there are signs that the financial world hasn’t learned, and that intervention is the only way forward: ‘Otherwise, we’ll be doing the equivalent of discharging ourselves from hospital after that small heart attack, and going straight out to celebrate with a carton of Rothmans, a bottle of tequila and a supersized Big Mac with jumbo fries�.
May 14, 2017
This book is an amazingly, almost unbelievably good primer for the crisis and the current financial system predicaments. It should be rightly titled “What’s Wrong With the World�, as it explains this as nothing else in the market (at least, that I’ve read, and I’ve read much already�) This is the definitive account to be read in the first place, even for people that understand the facts, as it contextualizes all the fundamentals, gives a historic perspective that’s interesting and relevant, and explains in lively and elegant fashion all the concepts, even the most esoteric ones, making everything understandable. And I mean everything. The writing is a paradigm of clarity, elegance and style. I read Capital, which is supposed to be Lanchester’s magnum opus, but it didn’t impress me. I am reading his “How to Speak Money� and I’m finding it interesting. This is different. This is great, even awesome. This is an accomplishment to be truly proud of.
Also, I’m pretty sure that it has been influential: For example, Mervyn King have read this book, I’m 100% sure, before setting out to write “The End of Alchemy�. All the talk in King’s book about “radical uncertainty� was surely lifted from here (“Financial markets aren’t like that: the impact of uncertainties is just too high. In financial markets, the lesson of history is paradoxical but clear: it is that you can’t rely on historical data.�); ditto the way the “taxpayer’s guarantee� pertaining to the banks is treated (“The banks knew that however bad and big a hole they got into, it would be impossible for governments not to help them out of it; which meant that they could carry on taking big bets, safely knowing that if the bets went bad, their respective governments—which means us, the taxpayers—would pick up the tab. Imagine if you go to a casino and play roulette, and every time you win, you keep all the money. But whenever the wheel lands on zero, you lose a sum amounting to ten times all the money you have won to date—and the good news is, you don’t have to pay it: the government steps in and picks up the tab, and you keep your previous winnings. How cool is that? In this system, your only incentive is to keep making bigger and bigger bets and making more and more money.�); and of course, the main tenet of “The End of Alchemy� is an attempt of a reply to a challenge from Lanchester in this book: “We need to create a system by which banks can fail without bringing one another down; by which they can go into administration and have their affairs unwound in the same way that ordinary businesses do. I have yet to see anybody come up with credible proposals to do that.� Of course, Lanchester radical solution (“I think this point can be substantially fixed, with another change to the law. The change should be that if a bank (broadly defined) receives any taxpayer money, the existing shareholders are (broadly speaking) wiped out. That’s what happens to investors in other institutions: if the firm you’ve bought a share in goes broke, you lose your money. At the moment, that doesn’t happen with banks because of the TBTF problem, which means that shareholders, and their representatives on bank boards, need only have to talk the talk about managing risk. This simple and brutal change in the law would make it incumbent on them to make sure the companies they own stay comfortably on the safe side of the street when it comes to managing their risks, and if that means smaller profits, well, that’s better than being wiped out completely.�) is beyond the pale for an ex-governor of the Bank of England, so Sir Mervyn has conjured a much more palatable alternative, which of course will also not have a chance in hell of ever being implemented, but I digress.
A few choice morsels.
About the Economic profession general attitude to that cumbersome detail generally called “reality�: “The defiance of common sense here is flagrant. If your mathematical model tells you that something is impossible—which is what, in practice, that degree of improbability implies—and then that thing happens, you know with certainty that your mathematical model is wrong. It doesn’t make sufficient allowance for reality. In this case, the unacknowledged reality was to do with portfolio insurance, but it doesn’t in fact matter what the unacknowledged thing was; it just matters that your model doesn’t work, because when unexpected things happen—and as every grown-up in the world knows, unexpected things happen all the time—the historically based mathematical model can’t cope with it.�
About those fine gentlemen in the City (or “some of them�): “The regulators failed; but they failed because the bankers made them fail. All the rules which existed, about bank capital and reserve requirements, about risk, and about cross-border regulatory supervision, were energetically, systematically, and determinedly circumvented by some of the banks. They treated the rules as things designed by thick people to slow them down and hamper their rightful profitability. It was self-evident to them that they had a better understanding of the risks they were taking than did anyone else. (�) The huge bailouts of major financial institutions means that the Anglo-Saxon model of capitalism has failed. The level of state intervention in the United States and United Kingdom at this moment is at a level comparable to that of wartime. We have, in effect, had to declare war to get us out of the hole created by our economic system. We have been left with these grotesque hybrids, privately owned banks which are able to generate boggling profits because their risks are underwritten by the taxpayer. It is a 100 percent pure form of socialism for the rich.�
Let’s finish the quotes with some pure awesomeness: “The credit crunch was based on a climate (the post–Cold War victory party of free-market capitalism), a problem (the subprime mortgages), a mistake (the mathematical models of risk), and a failure (that of the regulators). It was the regulators� job to prevent both the collapse of individual companies and the systemic risks which ensued; they failed. But that failure wasn’t due so much to the absence of attention to individual details as it was to an entire culture of the primacy of business, of money, of deregulation, of putting the interests of the financial sector first. This brought us to a point in which a belief in the free market became a kind of secular religion. The tenets of that religion are familiar, and they have been a central part of the story so far: the primacy of laissez-faire capitalism, the magically self-regulating nature of the market, the superiority of the free market to all other forms of human organization. These are all debatable, contestable positions—but in the Anglo-Saxon world, we forgot to contest them. This should be an enduring lesson of the crisis—an understanding that the rules governing the operating of markets were not handed down on stone tablets but made by human beings and are in constant need of revision, supervision, and active, imaginative enforcement. We can’t afford to forget this point: human beings make markets. A general recognition of that fact, led by the economics profession and taken to heart by politicians, would be a step so important as to be almost worth what it has cost to be reminded of it.�
Yes, this book is so good it’s unbelievable (and the audiobook is superbly read by James Langton). It will revolt, disgust and anger you beyond what you think possible, in a way no work of fiction will. That’s in a nutshell the power of reality � that elusive thing economists can’t get a hold on, but bankers control with brute force and no excuses.
Also, I’m pretty sure that it has been influential: For example, Mervyn King have read this book, I’m 100% sure, before setting out to write “The End of Alchemy�. All the talk in King’s book about “radical uncertainty� was surely lifted from here (“Financial markets aren’t like that: the impact of uncertainties is just too high. In financial markets, the lesson of history is paradoxical but clear: it is that you can’t rely on historical data.�); ditto the way the “taxpayer’s guarantee� pertaining to the banks is treated (“The banks knew that however bad and big a hole they got into, it would be impossible for governments not to help them out of it; which meant that they could carry on taking big bets, safely knowing that if the bets went bad, their respective governments—which means us, the taxpayers—would pick up the tab. Imagine if you go to a casino and play roulette, and every time you win, you keep all the money. But whenever the wheel lands on zero, you lose a sum amounting to ten times all the money you have won to date—and the good news is, you don’t have to pay it: the government steps in and picks up the tab, and you keep your previous winnings. How cool is that? In this system, your only incentive is to keep making bigger and bigger bets and making more and more money.�); and of course, the main tenet of “The End of Alchemy� is an attempt of a reply to a challenge from Lanchester in this book: “We need to create a system by which banks can fail without bringing one another down; by which they can go into administration and have their affairs unwound in the same way that ordinary businesses do. I have yet to see anybody come up with credible proposals to do that.� Of course, Lanchester radical solution (“I think this point can be substantially fixed, with another change to the law. The change should be that if a bank (broadly defined) receives any taxpayer money, the existing shareholders are (broadly speaking) wiped out. That’s what happens to investors in other institutions: if the firm you’ve bought a share in goes broke, you lose your money. At the moment, that doesn’t happen with banks because of the TBTF problem, which means that shareholders, and their representatives on bank boards, need only have to talk the talk about managing risk. This simple and brutal change in the law would make it incumbent on them to make sure the companies they own stay comfortably on the safe side of the street when it comes to managing their risks, and if that means smaller profits, well, that’s better than being wiped out completely.�) is beyond the pale for an ex-governor of the Bank of England, so Sir Mervyn has conjured a much more palatable alternative, which of course will also not have a chance in hell of ever being implemented, but I digress.
A few choice morsels.
About the Economic profession general attitude to that cumbersome detail generally called “reality�: “The defiance of common sense here is flagrant. If your mathematical model tells you that something is impossible—which is what, in practice, that degree of improbability implies—and then that thing happens, you know with certainty that your mathematical model is wrong. It doesn’t make sufficient allowance for reality. In this case, the unacknowledged reality was to do with portfolio insurance, but it doesn’t in fact matter what the unacknowledged thing was; it just matters that your model doesn’t work, because when unexpected things happen—and as every grown-up in the world knows, unexpected things happen all the time—the historically based mathematical model can’t cope with it.�
About those fine gentlemen in the City (or “some of them�): “The regulators failed; but they failed because the bankers made them fail. All the rules which existed, about bank capital and reserve requirements, about risk, and about cross-border regulatory supervision, were energetically, systematically, and determinedly circumvented by some of the banks. They treated the rules as things designed by thick people to slow them down and hamper their rightful profitability. It was self-evident to them that they had a better understanding of the risks they were taking than did anyone else. (�) The huge bailouts of major financial institutions means that the Anglo-Saxon model of capitalism has failed. The level of state intervention in the United States and United Kingdom at this moment is at a level comparable to that of wartime. We have, in effect, had to declare war to get us out of the hole created by our economic system. We have been left with these grotesque hybrids, privately owned banks which are able to generate boggling profits because their risks are underwritten by the taxpayer. It is a 100 percent pure form of socialism for the rich.�
Let’s finish the quotes with some pure awesomeness: “The credit crunch was based on a climate (the post–Cold War victory party of free-market capitalism), a problem (the subprime mortgages), a mistake (the mathematical models of risk), and a failure (that of the regulators). It was the regulators� job to prevent both the collapse of individual companies and the systemic risks which ensued; they failed. But that failure wasn’t due so much to the absence of attention to individual details as it was to an entire culture of the primacy of business, of money, of deregulation, of putting the interests of the financial sector first. This brought us to a point in which a belief in the free market became a kind of secular religion. The tenets of that religion are familiar, and they have been a central part of the story so far: the primacy of laissez-faire capitalism, the magically self-regulating nature of the market, the superiority of the free market to all other forms of human organization. These are all debatable, contestable positions—but in the Anglo-Saxon world, we forgot to contest them. This should be an enduring lesson of the crisis—an understanding that the rules governing the operating of markets were not handed down on stone tablets but made by human beings and are in constant need of revision, supervision, and active, imaginative enforcement. We can’t afford to forget this point: human beings make markets. A general recognition of that fact, led by the economics profession and taken to heart by politicians, would be a step so important as to be almost worth what it has cost to be reminded of it.�
Yes, this book is so good it’s unbelievable (and the audiobook is superbly read by James Langton). It will revolt, disgust and anger you beyond what you think possible, in a way no work of fiction will. That’s in a nutshell the power of reality � that elusive thing economists can’t get a hold on, but bankers control with brute force and no excuses.
Read
June 11, 2022Lanchester's "Whoops!" is a great primer on the sequence of events that brought about The Great Recession in 2007, which was mainly attributed to the housing bubble burst in the US (followed by the UK & EU, and subsequently the rest of the world thereafter).
While the focus is on the economic implosion in the US (& UK and EU peripherally), even if you don’t live in the wild wild West, this issue is undoubtedly one that affects everyone globally since whatever happens in the West does have a huge impact on the rest of the world (💀) , so it pays to know the history so that you’re well-armed in the subject, and that’s where this book proved its merits.
Lanchester succeeded in elucidating why the crash happened in simple economic terms, which is a boon for those of us who may require A Guide for Dummies on what went down before and after the 2007 recession. The author does not pretend to have all the answers to the obvious issue of “where do we go from here�, and even now, more than a decade after the events that unfolded, things aren’t looking much better for the US and the rest of the countries affected by this global recession.
It's enraging to read about how willfully blind these financial dudebros can be about the effects of their risky gambling on the rest of the population. The worst thing is that it seems like there have been no lessons learned taken from the 2007 crisis, as the wider issue persists and the balance between the rich and the poor grows ever wider in the face of the recent pandemic and economic crises.
Still, the author insists that all is not lost, as shown in Canada’s restraints and well-regulated financial system, so we can only hope that future legislators take a page from Canada’s books. Who knows, we might not be completely screwed just yet.
Related read(s):
While the focus is on the economic implosion in the US (& UK and EU peripherally), even if you don’t live in the wild wild West, this issue is undoubtedly one that affects everyone globally since whatever happens in the West does have a huge impact on the rest of the world (💀) , so it pays to know the history so that you’re well-armed in the subject, and that’s where this book proved its merits.
Lanchester succeeded in elucidating why the crash happened in simple economic terms, which is a boon for those of us who may require A Guide for Dummies on what went down before and after the 2007 recession. The author does not pretend to have all the answers to the obvious issue of “where do we go from here�, and even now, more than a decade after the events that unfolded, things aren’t looking much better for the US and the rest of the countries affected by this global recession.
It's enraging to read about how willfully blind these financial dudebros can be about the effects of their risky gambling on the rest of the population. The worst thing is that it seems like there have been no lessons learned taken from the 2007 crisis, as the wider issue persists and the balance between the rich and the poor grows ever wider in the face of the recent pandemic and economic crises.
Still, the author insists that all is not lost, as shown in Canada’s restraints and well-regulated financial system, so we can only hope that future legislators take a page from Canada’s books. Who knows, we might not be completely screwed just yet.
Related read(s):
July 10, 2010
A comprehensive Great Recession review. Communism collapsed as an economic system more or less in 1989 after seventy or so mostly dysfunctional years. Did capitalism outlast it only by another two decades? This intriguing argument is put forward by Lanchester unfortunately only very late in this book. Leading up to it is a fairly yeoman round-up with UK accented authority of what active business readers already know from dozens of Wall Street Journal articles and hours of CNBC.
Lanchester fills out the first seven sections with what have become the standard business fables of the 00’s: the bursting of the tech stock bubble, the Enron implosion, the brazen accounting fraud that took out Worldcom and Arthur Anderson, the complete relaxation of bank loan review standards and of the standards of bond rating agencies and the Great Recession that ensured. He trots out the usual suspects for pillory: Skilling (the departed Ken Lay gets a pass), Ebbers, Richard Fuld who earned hundreds of millions and a sizable pension for running Lehman aground, the ironically named Bernie Madoff and the entire ”boys will be boys� Bush 43 administration (Bear Stearns bankrupter Jimmy Cayne and golden toilet buyer John Thain are conspicuously absent). Intensified piling on is reserved for the U.S. SEC which is shown to be slightly less effective a watchdog as a low functioning WWE referee and for AIG’s Joseph Cassano whom Lanchester singles out as the man most singularly responsible for the whole train wreck (Cassano’s Financial Products division’s implosion bankrupted AIG and made it a $180 billion USD ward of the state yet Cassano was retained as a multi-million dollar a month consultant prompting a frustrated U.S. Senator to bark at a hapless AIG executive ”w would he have to have done to get you to fire him?! Lanchester also pours scorn on ”ydz� by which we assume he means consumers who borrowed and charged more debt they knew they could never pay back. Frugal readers who borrowed sensibly will find his lack of precision on this point insulting.
Readers interested in this type of book likely know all of this background already but Lanchester does organize and present it well. It is the final section where Lanchester finds his outraged voice and drops the Ayn Rand and Nassim Taleb review of literature. Instead of the ranks of the insolvent unable to pay their debts being just a few deadbeats, they are now legion and system-wide. Former world class blue chip business AIG, Citigroup, GM and others are now government operations. Fannie and Freddie are gushing red ink and nearly every EU country owes millions more than they can conceivably pay back to the every other EU country. Does the capitalist system work no longer? Lanchester leaves the argument here and it would have been more interesting to have taken that as the central contention and written from there.
April 28, 2011
Posted on my .
Like a lot of people in the world today, I've been struggling for a while to truly understand just how things got to be the way they are right now. Even with everyone and their uncle talking about the crisis, most of what is said concentrates on throwing accusations to one another, and I've missed seeing a systematic, organized account of what went on.
I admit, I'm not the most economically savvy person - my education has been focused primarily in the natural sciences and art. But I like to have basic knowledge of pretty much everything (not the healthiest of habits, I know) and not understanding the economic principles behind the crisis upset me, which is why I read this.
This book might just be the most important book I've read so far, this year. It's a great introduction for those who, like me, don't necessarily understand derivatives, credit default swaps, securitization, or how bail outs work. Beware though, this is not for the faint of heart - it's not easy to wrap your head around the sheer craziness of the financial systems, and the unfairness of it all is even harder to accept.
My country is now in the middle of this whole economic shenanigan. A lot of the things in this book, being mostly US and UK-centric, don't apply to us, and our situation can't be explained only by the financial system (our political systems played a big part too), but it's not hard to see that most of what went on globally is a direct consequence of the financial system's irresponsibility. It’s not hard to see that, after the housing and personal credit bubbles burst and financial institutions no longer had that source of high-risk, high-interest rates income, they had to find something else to milk for money. That something, it turns out, is entire countries. And the infamous rating agencies, the central banks, the IMF, they're all part of a broken system that results solely in putting money in the hands of the people who need it the least.
I only wish that more people would read things like this to truly understand what went on. After all, a big part of the problem is that most people had no idea of what was going in. Instead, I suspect most people just won’t find the attention span needed, and will just keep on looking for someone else to blame, not to mention keep on being more concerned with money than with value. That’s human nature for you.
As it says on the book:
Highly recommended for everyone.
Like a lot of people in the world today, I've been struggling for a while to truly understand just how things got to be the way they are right now. Even with everyone and their uncle talking about the crisis, most of what is said concentrates on throwing accusations to one another, and I've missed seeing a systematic, organized account of what went on.
I admit, I'm not the most economically savvy person - my education has been focused primarily in the natural sciences and art. But I like to have basic knowledge of pretty much everything (not the healthiest of habits, I know) and not understanding the economic principles behind the crisis upset me, which is why I read this.
This book might just be the most important book I've read so far, this year. It's a great introduction for those who, like me, don't necessarily understand derivatives, credit default swaps, securitization, or how bail outs work. Beware though, this is not for the faint of heart - it's not easy to wrap your head around the sheer craziness of the financial systems, and the unfairness of it all is even harder to accept.
My country is now in the middle of this whole economic shenanigan. A lot of the things in this book, being mostly US and UK-centric, don't apply to us, and our situation can't be explained only by the financial system (our political systems played a big part too), but it's not hard to see that most of what went on globally is a direct consequence of the financial system's irresponsibility. It’s not hard to see that, after the housing and personal credit bubbles burst and financial institutions no longer had that source of high-risk, high-interest rates income, they had to find something else to milk for money. That something, it turns out, is entire countries. And the infamous rating agencies, the central banks, the IMF, they're all part of a broken system that results solely in putting money in the hands of the people who need it the least.
I only wish that more people would read things like this to truly understand what went on. After all, a big part of the problem is that most people had no idea of what was going in. Instead, I suspect most people just won’t find the attention span needed, and will just keep on looking for someone else to blame, not to mention keep on being more concerned with money than with value. That’s human nature for you.
As it says on the book:
Public rage is like lightning, and tends to discharge its energies at anyone who has the bad luck to be prominent in the wrong way at the wrong time. As for where the anger would go if it were properly directed, that’s easy to answer: at the banks, and at the governments which let the banks do what they did.
Highly recommended for everyone.
October 1, 2014
The problem with enough
[Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com Inc., listed on Nasdaq, which fully owns ŷ.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com Inc. is also requested to provide assurance that its employees and contractors' work conditions meet the highest health and safety standards at all the company's sites].
Populist and coarse as it is, the book has still got rare moments of grace - mostly when the author turns to his literary background to shed new light on actors or aspects of our great financial comedy of errors that have passed generally unnoticed. The parallel between modernism in classical music (Strawinskij), literature (T.S. Eliot) and jazz (Coltrane), and the rise of derivatives, or the analysis of Ayn Rand's influence on Alan Greenspan's worldview are examples of an intellectual freedom that very often gives way to a banal sense of humour and petty narratives, as in standard self-help books.
The author lacks a general theory or a model to make sense of the crisis, and necessarily has to fall back on the usual 'greed plus limited rationality' argument. However, some of the stories he tells are remarkable (e.g., the use of sub-prime mortgages in the US for a quasi racial cleansing), and there is a lot to learn, especially if you do not live in an anglo-saxon society (see the comparison between the British and French attitudes towards home ownership).
The author concludes, without a doubt in good faith, that we would not have experienced such a degree of destabilization had it not been for our greed and inability to be content with enough. Such appeals to individual behaviours, in the face of systemic conditions that nullify the effort of any single actor (it's like saying, 'get your act together and stop falling prey to gravity'), are dernier cri in neo-liberalism's post-crisis flourish ('it is not the system to blame, it is you'). That a good guy like Lanchester unwittingly ends up siding with those whom he tries to expose is a sign of the perils of our time's ideological blindness.
[Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com Inc., listed on Nasdaq, which fully owns ŷ.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com Inc. is also requested to provide assurance that its employees and contractors' work conditions meet the highest health and safety standards at all the company's sites].
Populist and coarse as it is, the book has still got rare moments of grace - mostly when the author turns to his literary background to shed new light on actors or aspects of our great financial comedy of errors that have passed generally unnoticed. The parallel between modernism in classical music (Strawinskij), literature (T.S. Eliot) and jazz (Coltrane), and the rise of derivatives, or the analysis of Ayn Rand's influence on Alan Greenspan's worldview are examples of an intellectual freedom that very often gives way to a banal sense of humour and petty narratives, as in standard self-help books.
The author lacks a general theory or a model to make sense of the crisis, and necessarily has to fall back on the usual 'greed plus limited rationality' argument. However, some of the stories he tells are remarkable (e.g., the use of sub-prime mortgages in the US for a quasi racial cleansing), and there is a lot to learn, especially if you do not live in an anglo-saxon society (see the comparison between the British and French attitudes towards home ownership).
The author concludes, without a doubt in good faith, that we would not have experienced such a degree of destabilization had it not been for our greed and inability to be content with enough. Such appeals to individual behaviours, in the face of systemic conditions that nullify the effort of any single actor (it's like saying, 'get your act together and stop falling prey to gravity'), are dernier cri in neo-liberalism's post-crisis flourish ('it is not the system to blame, it is you'). That a good guy like Lanchester unwittingly ends up siding with those whom he tries to expose is a sign of the perils of our time's ideological blindness.
December 26, 2010
This is simply one of the most frightening books I have ever read. Lanchester sets out the causes of the current economic recession following the 'credit crunch' with a power and clarity that is superb - he manages to explain the culture of finance, the novel financial products and the relationships between the financial institutions and governments in a way which is understandable and memorable. The dominance of 'city culture', the drive for ever increasing profits, the belief in economic models that defied any sort of common sense or historical reality, a wider culture which both de-regulated the banking sector and allowed it to ignore the regulations still in place. All terrifying, but not nearly so much as the implication that we, as a society, haven't learnt our lesson.
Lanchester states while an industry makes products which, hopefully, makes money (shoes, movies, books, whatever) for the last thirty years we have increasingly moved into a world where the bottom line is everything, where making increasing profits is the primary goal of all sectors of the western economies - even such things as health care and education. He briefly makes the aside that some countries (Canada, for example) did not buy into the laissez faire free-for-all, but as we move into a century in which economic power moves from America and Europe to China and India, I fear that they have learnt the positive lessons from us but none of the negative ones.
Lanchester states while an industry makes products which, hopefully, makes money (shoes, movies, books, whatever) for the last thirty years we have increasingly moved into a world where the bottom line is everything, where making increasing profits is the primary goal of all sectors of the western economies - even such things as health care and education. He briefly makes the aside that some countries (Canada, for example) did not buy into the laissez faire free-for-all, but as we move into a century in which economic power moves from America and Europe to China and India, I fear that they have learnt the positive lessons from us but none of the negative ones.
February 20, 2010
Part breezy primer on what exactly "banking" means these days (never will you be more entertained by a definitions of derivatives); part vivid, step-by-step analysis of how said bankers and their enablers in government have nearly destroyed the world's economy these past ten years or so, and ruined so many lives of just regular non-banker people... with virtually NO PENALTY OR CONSEQUENCES; part measured attack on the culture of greed and asshole-ness, and how the Anglo-Saxon version of capitalism (practiced most heartily in the US and UK) has gone seriously awry, to the detriment of us all. Serious stuff, explained with intelligence, humor and clarity by British journalist John Lanchester. It's a short book, and fast read, and, I would say, a total must.
February 1, 2015
If ŷ allowed readers to award a book 6 stars, that's what I would give I.O.U. Without a doubt it is one of the best, and one of the most significant, books I have read in a long time. It should be required reading of every college student or, better yet, of everyone who votes.
February 2, 2020
Ох, не се бях смяла така с книга от векове. Размазах се от кеф.
Визирайки, че това е книга, в която се говори за световната финансова криза от 2008 година, някак си очаквах скучна и неразбираема материя, а не да се превивам от смях при всяко следващо цветущо описание. Остави забавната част, ами нещата авторът ги обяснява простичко и ясно, така че всеки обикновен човек да може да го разбере. Пълен разкош. Не вярвах, че икономическа книга може да е такова приятно и забавно четиво, но ето, че бях опровергана.
Със сигурност ще си купя книжно копие на книгата за мен си, да си я препрочитам, защото определено има първо много полезна информация и второ малко смях винаги е полезен, когато ти съобщават, че буквално винаги си прецакан като гражданин. :)
Говорейки за съдържанието, книгата с елегантно черно чувство за хумор ясно дава да разбереш, че ние като граждани сме винаги от към губещата страна, защото когато банките правят мизерии, ние сме тези, които поемат бремето. Определено е невероятна книга, която всеки човек трябва да прочете, но ако не искате да си разваляте вярата, че банките са сигурни, то не го правете, ще разбие всичките Ви илюзии на пух и прах. Предупредени сте! :Р
Визирайки, че това е книга, в която се говори за световната финансова криза от 2008 година, някак си очаквах скучна и неразбираема материя, а не да се превивам от смях при всяко следващо цветущо описание. Остави забавната част, ами нещата авторът ги обяснява простичко и ясно, така че всеки обикновен човек да може да го разбере. Пълен разкош. Не вярвах, че икономическа книга може да е такова приятно и забавно четиво, но ето, че бях опровергана.
Със сигурност ще си купя книжно копие на книгата за мен си, да си я препрочитам, защото определено има първо много полезна информация и второ малко смях винаги е полезен, когато ти съобщават, че буквално винаги си прецакан като гражданин. :)
Говорейки за съдържанието, книгата с елегантно черно чувство за хумор ясно дава да разбереш, че ние като граждани сме винаги от към губещата страна, защото когато банките правят мизерии, ние сме тези, които поемат бремето. Определено е невероятна книга, която всеки човек трябва да прочете, но ако не искате да си разваляте вярата, че банките са сигурни, то не го правете, ще разбие всичките Ви илюзии на пух и прах. Предупредени сте! :Р
March 16, 2025
I do love me a non-fiction book that manages to explain complex things with normal words as well as a lighthearted, yet sarcastic sense of humor. Every time I'm reminded of how banks operate, I get even angrier lmao
October 18, 2021
I'm finally sick of GoodReads review system so I'm going to start rating them properly. 6.6/10
August 11, 2012
It is 2012 and the United States will soon be forced to choose whether a Republican or a Democrat should run America. Although many journalists focus on what should be done to fix the financial crisis, after reading John Lanchester's I.O.U.: Why Everyone Owes Everyone and No One Can Pay I would like to see journalists ask the candidates what caused the financial collapse.
Lanchester points to four primary causes: a culture, a problem, a mistake, and a failure.
The problem was the subprime mortgages. These subprime mortgages became commonplace at the start of the 21st century. Stocks were paying little after the Dot-Com crash, bonds weren't paying since the fed was keeping interest rates low, so investors turned to the housing market. The government had passed legislation encouraging banks to lend to "underserved" communities -- people with little income and weak credit histories -- and so banks complied. Soon, everyone jumped on the bandwagon, and a national housing market was created, expanded, and burst within ten years.
The mistake was that banks had devised models of assessing risk that were incapable of predicting a crash. Anyone that looked at the system could see the problem. The banks were lending to people that were unlikely to pay back their loans. But the banks' models were not predicting that a crash could happen, so they continued lending money.
An argument could be made, and is made by bankers all the time, that the banks were right to continue lending. After all, they had worked out a way to write risk off their books through credit default swaps and collateralized debt obligations. Basically, the banks would take a bunch of debts, bundle them together, and sell them off. The bank did not carry the risk anymore, so why not lend more money? This allowed the banks to stop analyzing credit history, and so when borrowers lied about their credit history, the banks had no reason to care.
The failure is that no regulating body in America and the U.K. cared to step in.
Lanchester explains that all of this was allowed by the culture of Anglo-American capitalism. He refers to this culture as the "post-Cold War victory party." During the Cold War, the capitalists felt obligated to allow commoners to live at a comfortable standard of living -- one nicer than the standard of living in Communist countries. After, the free market was given free reign. The gap between the rich and poor grew. The average income of the middle class remained stagnant. Depression era regulations -- such as the separation of commercial and investment banking to protect the middle class from the carefree gambling of the rich -- were targeted and undone.
It would be easy to blame the banks or the government exclusively for what happened, but Lanchester points out that there were many people that lined up to take hold of the easy credit during the victory party. Now, the banks are too big to fail, which has led to a situation in which the banks take risks and profits while costs of the crash are socialized.
How perverse is that?
I suppose the only thing that's more perverse is that the banks are acting like the victory party is still happening. Then again, for them, it is. There are fewer banks now, which means that the banks are making more money and are able to give their executives massive bonuses. The banks are still relying on the same models to calculate risk. The only difference is that they are much more reluctant to lend. Unfortunately, banks are an essential part of a growing economy because it is the bank that lends money.
Lanchester's book does a fine job of outlining how the world economy collapsed. He takes a subject that I would have thought boring -- banking -- and explains it in a way that is accessible. My only concern is that this 200+ page book likely leaves readers feeling overconfident about their understanding of finance. Still, it also has generated in me an interest in finance that I think will lead me to read more.
So if I see one of America's presidential candidates explain how the financial collapse happened, you can be sure that I'll be reading it. And that's thanks to John Lanchester's book.
Lanchester points to four primary causes: a culture, a problem, a mistake, and a failure.
The problem was the subprime mortgages. These subprime mortgages became commonplace at the start of the 21st century. Stocks were paying little after the Dot-Com crash, bonds weren't paying since the fed was keeping interest rates low, so investors turned to the housing market. The government had passed legislation encouraging banks to lend to "underserved" communities -- people with little income and weak credit histories -- and so banks complied. Soon, everyone jumped on the bandwagon, and a national housing market was created, expanded, and burst within ten years.
The mistake was that banks had devised models of assessing risk that were incapable of predicting a crash. Anyone that looked at the system could see the problem. The banks were lending to people that were unlikely to pay back their loans. But the banks' models were not predicting that a crash could happen, so they continued lending money.
An argument could be made, and is made by bankers all the time, that the banks were right to continue lending. After all, they had worked out a way to write risk off their books through credit default swaps and collateralized debt obligations. Basically, the banks would take a bunch of debts, bundle them together, and sell them off. The bank did not carry the risk anymore, so why not lend more money? This allowed the banks to stop analyzing credit history, and so when borrowers lied about their credit history, the banks had no reason to care.
The failure is that no regulating body in America and the U.K. cared to step in.
Lanchester explains that all of this was allowed by the culture of Anglo-American capitalism. He refers to this culture as the "post-Cold War victory party." During the Cold War, the capitalists felt obligated to allow commoners to live at a comfortable standard of living -- one nicer than the standard of living in Communist countries. After, the free market was given free reign. The gap between the rich and poor grew. The average income of the middle class remained stagnant. Depression era regulations -- such as the separation of commercial and investment banking to protect the middle class from the carefree gambling of the rich -- were targeted and undone.
It would be easy to blame the banks or the government exclusively for what happened, but Lanchester points out that there were many people that lined up to take hold of the easy credit during the victory party. Now, the banks are too big to fail, which has led to a situation in which the banks take risks and profits while costs of the crash are socialized.
How perverse is that?
I suppose the only thing that's more perverse is that the banks are acting like the victory party is still happening. Then again, for them, it is. There are fewer banks now, which means that the banks are making more money and are able to give their executives massive bonuses. The banks are still relying on the same models to calculate risk. The only difference is that they are much more reluctant to lend. Unfortunately, banks are an essential part of a growing economy because it is the bank that lends money.
Lanchester's book does a fine job of outlining how the world economy collapsed. He takes a subject that I would have thought boring -- banking -- and explains it in a way that is accessible. My only concern is that this 200+ page book likely leaves readers feeling overconfident about their understanding of finance. Still, it also has generated in me an interest in finance that I think will lead me to read more.
So if I see one of America's presidential candidates explain how the financial collapse happened, you can be sure that I'll be reading it. And that's thanks to John Lanchester's book.
October 19, 2017
It started when a coworker decided to explain to me that the 2008 - 2009 financial crisis featured in The Big Short was really caused by self serving politicians forcing poor bankers to give undeserving poor people loans...he really said “forced�. I softly tried to disagree as I tried to dredge up what I remembered from reading The Big Short a few years ago.
Anyway I ended up reading this book to help me understand it. I think it did a good job of giving a reasonable explanation of the particulars as well as what the broader causes might have been.
He eventually works himself up to this condensation of what happened to cause so much grief. There was a cultural climate, a specific problem, a huge mistake and finally a final failure.
Climate of post cold war victory party with turbocharged free market capitalism
Problem of subprime mortgages
Mistake of mathematical models of risk
Failure of regulation
I like his entry point on explaining why in the last few decades capitalism grew more and more free- market.
“For decades there was the equivalent of an ideological beauty contest between the capitalist West and Communist East, both of them vying to look as if they offered their citizens the better, fairer way of life.� Page 17
So when even the option of a communist takeover of a country by the people was gone it cemented a “clear ideological hegemony� for capitalism. This, coupled with capitalism via industry (making stuff) being usurped as the king of capitalism by the financial sector (making money but moving money around) resulted in exponential pay increases to the financial giants, who after all weren’t encumbered by the restrictions of having to actually produce something.
He definitely covers the development of subprime mortgages but from the consumer end it was not that complicated.
But the explanations of the new financial tools like securitization and derivatives and CDOs and CDSs were a little harder to grasp. He does a good job, but I personally find such things soooo boring, even when they are integral to a pretty dramatic story. So for what I don’t understand about them, the failing is all mine.
Anyway..I was rewarded when he quoted extensively from Alan Greenspan’s testimony to the house committee on oversight and government reform�
“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations would have been far smaller and defaults accordingly far fewer�..The consequent surge in global demand for US subprime securities by banks, hedge, and pension funds supported by unrealistic positive rating designations by credit agencies was in my judgment, the core of the problem� pg 165
Lancaster has more to say about what Greenspan said, but this was exactly the clarification I could have used to counter my coworker’s lone gunman theory of the financial crisis. I know he had two bad guys, politicians and poor people, but I wanted to use “lone gunman theory� in my review.
Good book, informative and if it was more detailed it might satisfy some ŷ critics who lament what was left out, but if it had much more I probably would’t have been able to finish it.
Anyway I ended up reading this book to help me understand it. I think it did a good job of giving a reasonable explanation of the particulars as well as what the broader causes might have been.
He eventually works himself up to this condensation of what happened to cause so much grief. There was a cultural climate, a specific problem, a huge mistake and finally a final failure.
Climate of post cold war victory party with turbocharged free market capitalism
Problem of subprime mortgages
Mistake of mathematical models of risk
Failure of regulation
I like his entry point on explaining why in the last few decades capitalism grew more and more free- market.
“For decades there was the equivalent of an ideological beauty contest between the capitalist West and Communist East, both of them vying to look as if they offered their citizens the better, fairer way of life.� Page 17
So when even the option of a communist takeover of a country by the people was gone it cemented a “clear ideological hegemony� for capitalism. This, coupled with capitalism via industry (making stuff) being usurped as the king of capitalism by the financial sector (making money but moving money around) resulted in exponential pay increases to the financial giants, who after all weren’t encumbered by the restrictions of having to actually produce something.
He definitely covers the development of subprime mortgages but from the consumer end it was not that complicated.
But the explanations of the new financial tools like securitization and derivatives and CDOs and CDSs were a little harder to grasp. He does a good job, but I personally find such things soooo boring, even when they are integral to a pretty dramatic story. So for what I don’t understand about them, the failing is all mine.
Anyway..I was rewarded when he quoted extensively from Alan Greenspan’s testimony to the house committee on oversight and government reform�
“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations would have been far smaller and defaults accordingly far fewer�..The consequent surge in global demand for US subprime securities by banks, hedge, and pension funds supported by unrealistic positive rating designations by credit agencies was in my judgment, the core of the problem� pg 165
Lancaster has more to say about what Greenspan said, but this was exactly the clarification I could have used to counter my coworker’s lone gunman theory of the financial crisis. I know he had two bad guys, politicians and poor people, but I wanted to use “lone gunman theory� in my review.
Good book, informative and if it was more detailed it might satisfy some ŷ critics who lament what was left out, but if it had much more I probably would’t have been able to finish it.
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