ISBN 978-0-141-04571-9. “Whoops – Why everyone owes everyone and no one can pay” by John Lanchester was published by Penguin Books in 2010 (this paperback edition has new material – the original was published in 2010 by Allen Lane). You can almost fall in love with this book from its great subtitle. However when you read it you will note a strong resemblance to “How Markets Fail – The Logic of Economic Calamities” by John Cassidy (2009 Penguin ISBN 978-0-141-03651-9) which we reviewed on Oct 16th 2012. Whereas Cassidy provides a long history of the origins of modern neo-liberal economics; Lanchester chooses to cut straight to how the crash happened and who was to blame. Beyond that, he asks the questions we should all be asking: when is enough, enough?
The glowing recommendations on the cover pages implies that this is some ‘idiots guide’ to how the financial markets failed – however, to be fair, it is only slightly better explained that it is in the Cassidy book. What is curious is Lanchester’s pedigree; practically he has no track record of writing on financial affairs. Depending upon your point of view this is either a really good thing or a really bad thing. Take it from us – this is actually a good thing. This work is fresh and dripping with anger. The many accolades also imply this is a witty book. In fact it isn’t particularly funny. The author has attempted humour here and there but mostly it is off the mark and largely failed to raise a smile with us. (And there we were thinking that we had a good sense of humour!)
Given these facts you might be forgiven for thinking you should pick up the Cassidy book and dispense with this. Not true. Lanchester actually comes into his own in the latter half of “Whoops!”. Cassidy’s retelling is largely factual and ends with questioning what sort of regulations should bind the markets. Lanchester starts from this point then just jams with the idea. His work spins out into all kinds of philosophical angles which includes asking “what are the markets for?” In essence Lanchester has got right under the skin of the problem and is really asking; where do we go next?
So what caused the crash of 2008? Lanchester tells the following anecdote:
“A very senior Treasury figure reports that a bank board member came up to him at a social function and said he had some good news: ‘we’re no longer going to get involved in things we don’t understand.’ The Treasury official added: ‘We now own his bank.'”
This was precisely the reason. The young mathematical geniuses at these quasi-banks came up with ways of measuring and handling risk. The problem was nobody understood how the maths worked. The entire industry intellectualised-away the concept of risk. It became a game of smoke and mirrors that went on for several years until somebody realised that, in fact, the AAA rated investments were actually junk. The junk was loans to people who couldn’t pay their mortgages: the subprime market. Since securitisation had removed the risk from the sales process it no longer mattered who you sold a mortgage to. Ability to pay didn’t matter as long as you could bury the risk in a financial instrument that disguised the toxic asset inside. As Cassidy has pointed out in “How Markets Fail” (and repeated here by Lanchester pages 82-83) the subprime market was originally exploited for political reasons with both Presidents Bush and then Clinton signing legislation to enforce lending into that market. Pile upon that the de-regulation of the market (such that there was no over-sight into what shady deals were being cut) and you have a recipe for disaster.
The failures were compounded by an economics profession asleep at the wheel:
“…assumptions of rationality permeate modern economics, and are one of the reasons the field has sharply contracted in its practical usefulness.”
In essence: they have no idea how the world works any more. They have conjured up a world where crashes don’t happen. The market is self correcting and perfect. Ideology ruled:
“…a computer program written to impersonate Alan Greenspan would have said: free-market good. Trust free market. More free market. As so often with the ideologically committed free-marketeer, there is no sense that he’s actually thinking about what he’s saying: he’s merely adumbrating arguments towards a conclusion he reached in advance.”
Coupled to this the hopeless corruption of the democratic process, to this ideology, and you have the perfect coup. Or, in this case a “Quiet Coup” as described well by Simon Johnson, a professor at MIT and former economist at the IMF. Of Johnson the author writes:
“He acquired an extensive experience of countries which had effectively been captured by a ruling elite who governed entirely in their own interests. His startling conclusion about the current crisis is that the US has become one of those countries. As the banking sector got richer, its power and influence over US government policy increased – power and influence which the bankers weren’t at all afraid to use.”
The Bankers had a free hand in rewriting the laws of finance so that they could go ahead and do whatever they wanted to make money. And if the laws that did exist didn’t suit them then they simply found clever ways of circumventing them. Afterall, there was nobody watching. No regulatory body really cared – afterall, why should they? Wasn’t the free market supposed to take care of this? Lanchester likens it to speed freaks who have figured out that speed cameras can’t catch them if they drive at 70mph in a 30mph zone. Reckless, dangerous, irresponsible and criminal. An accident waiting to happen.
But there is a reality check in all of this: yes, it was avoidable and we learnt nothing from the Great Depression. But, no, we can’t just turn the clock back. Lanchester reminds us that:
“When Mrs Thatcher came to power, you couldn’t take more than £500 out of the country at any one time – a restriction which now seems as distant as that of whale-bone corsetry.”
It is sobering to realise that so much of what happened in the peak Thatcher years of the 1980’s can still be regarded as a good thing: a positive modernisation of outdated practices. Much of the problems we see today evolved much later, albeit in a market place where the ideology of Thatcher had become the default operating system. In short, a slippery slope. The assumption had become one of: it worked back then, so lets keep doing the same thing again and again until it stops working. But, of course, it had stopped working years ago but nobody in control had noticed. They weren’t paid to notice because the entire crazy scheme was benefiting the minority of people in control. It became remote, unwieldy and unworldly.
Lanchester explores the “what is it all for?” question and the conflicts between manufacturing industry and the finance sector. He doesn’t over-romanticise manufacturing but he does ask some hard questions of the Finance Industry. Is shareholder value all that matters? There is an enormous cultural rift between how industry works and how the finance sector see the needs of the rest of the economy. Most industries are focused on performing a service and doing it well. Their profits spawn from doing that “something” well. It is their reward but not their only reward. In essence: “money doesn’t care” writes Lanchester. Manufacturers sees the City’s capital as a means to an end, not an end in itself. They are right. Our economy is out of balance – the finance sector in Britain is bloated to six times the size (relative to the rest of the economy) of what it is in the USA.
“…failure wasn’t so much the absence of attention to individual details as it was an entire culture to do with the primacy of business, of money, of deregulation, of putting the interests of the financial sector first. This bought us to the point in which a belief in the free market became a kind of secular religion.”
And it did NOT have to be this way. It is instructional as to what happened (or, more accurately, did NOT happen) in Canada during the Banking crash. Canadian banking remained more regulated than in the UK & American systems hence, in 2008, it alone did not need to bail out its banks. It was the only one of the G8 not to require bank bailouts.
“…this, incidentally, did not come at the cost of falling behind in other areas: since 2004, Canadian average incomes have grown at 11 percent a year, compared with 5 percent in the USA. A country doesn’t have to have a frenetically overactive financial sector in order to have a thriving economy.”
So what next? Lanchester kicks in with precisely the sort of questions we should all be asking about our society. It was Keynes who predicted in 1930 (in “Economic Possibilities for our Grandchildren”) that the British would become so rich by 2030 that “We shall be able to afford to dare to assess the money-motive at its true value.” to which Lanchester adds his own thought:
“The increase in our prosperity over the last decades has caused no general sense that we should now slow down and reflect on where we are, who we are and what we want from life.”
Of course, a small number of us ARE now asking this question. Sadly it remains too few. The Transition movement started by Rob Hopkins in 2006 remains completely out-of-step with most of the rest of modern culture. Yet it remains almost unique for asking exactly these sort of questions.
Lanchester does not hold the bankers solely to blame. We are sure that there are some extreme ideologues on the political Right (and many who work in financial institutions) today who would claim that the City of London made money for all of us. A sort of modernist version of Thatcher’s “trickle down” theory or Cameron’s “we’re all in this together”. The author doesn’t go quite that far but does point out that we were all willing partners to the credit explosion:
“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. Well boo-hoo. Bankers are to blame, but we’re to blame too. That’s just as well, because we’re the ones who are going to have to pay.”
Was the price worth it? Absolutely not. The author writes at length about our culture, our social contract, our values and our principles. What of them? What kind of society can we actually afford? We attempted to borrow our way to nirvana but that approach failed. The cost we paid was far higher than the value of goods and services we got for ourselves in the good times. Hence we need to be on a new path of economic development. NOW is the time to reflect where the hedonic treadmill has got us:
“We in the west can do something that no people in history have done; we can show the world that we know when we have enough. As the planet runs out of resources, due mainly to the fact that everyone on it wants to live an equivalent lifestyle to those of us in the west, this lesson would have the potential to save the world.”
So how much is the bill? Lachester provides the numbers for the USA for perspective: between $4.62 and $7.76 trillion.
“That number is bigger than the cost of the Marshal Plan, the Louisiana Purchase, the 1980s Savings and Loan crisis, the New Deal, the invasion of Iraq, the Vietnam war and the total cost of Nasa including the moon landings, all added together – repeat, added together (and yes,the old figures are adjusted upwards for inflation).”
It is difficult to comprehend the cost of this screw-up. It leaves us forever beholden to the greed of a few. Left with a debt so over-whelming that it is hard to imagine what kind of Shangri-la we must have been living in BEFORE the 2008 crash. What the heck were we thinking? Now is the time for that money to have been spent decarbonising our economy. Now it is all gone. The author laments:
“Free-market capitalism’s victory party lasted for two decades: now it is time to slow down, calm down and decide how to make the finance industry back into something which serves the rest of society rather than predating on it. [..] we have to start thinking about when we have sufficient – sufficient money, sufficient stuff – and whether we really need the things we think we do, beyond what we already have. In a world running out of resources, the most important ethical and political and ecological idea can be summed up in one simple word: ‘enough’.”
Those were the final words from the original imprint of this book. In August 2010 the author added an update to the words he wrote one year before. He reviewed what progress had been made in reforming our financial industry. His conclusion? NOTHING. The book ends on a bit of a downer. Lanchester only concludes that the crash wasn’t big enough for us to change our ways. He predicts that there will be another crash in the next few years. Any number of things could cause it. It will be a crash from where there is no way out other than to re-invent the system.
Can we reinvent the system? Can we reinvent ourselves? Of all the books about what happened in the credit crisis this is probably the most sobering. It challenges us, all of us, to appraise exactly what it is our society needs. Not what it wants. What it needs. Do we have an answer? Are we ready for even more hard times to come? Can we get over the party, awaken in the cold light of dawn and feel the world’s worst hangover? So far we are limping on by a few sips of hair-of-the-dog. This is not the transformation we need to build a sustainable economy. That transformation is yet to come. We have trapped ourselves down a hole of our own making.
All the old solutions will simply stop working. We might, actually, have to do some hard work to get out of this. We might, actually, have to start talking to each other. We might, just, start needing our communities again. The world to come is far more frightening than what we thought our future held for us. But it will be resilient. It will be resilience that truly counts in the end. Any fool can throw a ball in the air. It takes a good man to catch it again. Can we pick ourselves up, brush ourselves down and get ready for the catch? Only time will tell.
A highly recommended book. It makes you question everything. You can’t ask for any more.