Lanchester, John. I.O.U.: Why Everyone Owes Everyone and No One Can Pay. McClelland and Stewart, New York, 2010. NF; 8/18.
Innumeracy is a terrible curse. Although I memorized my way through medical school and can write a respectable expository article, I have to count on my fingers when I add or subtract, and love electronic calculators because I don’t remember much of the multiplication times table. Being this way has consequences like never properly understanding my own money, let alone negotiating the terrible world of finance and economics.
This book however explained the financial crisis of 2008 so even I could understand it, and I understood it well enough that it scared the hell out of me. It’s now eight years after the book was published, but the known state of the global financial system in 2010 makes it look like Western capitalism is headed off a cliff. I’ve said many times that the 2000’s will be China’s century, but that may be much more starkly true than I ever dreamt.
Pared down, the catastrophe in 2008 depended on two things: subprime mortgages and credit default swaps. These two inventions of giant investment banks had the combined effect of loaning money to people who in the past could never (and shouldn’t ever) borrow huge amounts (jobless, mendacious, addicted, ex-convict, penniless people. These are the subprime mortgages), and then encouraging those banks to pay other financial institutions to assume the risk of these people defaulting on their loans (the “swaps”). Many thought this would improve safety by spreading risk around, but it ended up entangling (like disorganized rope all over the floor of a boat, attached to a huge weight plummeting into the ocean) all the biggest banks not just in risk but in certainty of a really big default. Mathematical models said the risk of this was something like one in 3 trillion, but “when unexpected things happen — and as every grown-up in the world knows, unexpected things happen all the time — the historically based mathematical models can’t cope with it.” American and UK federal governments (taxpayers, that is) along with many others bailed these banks out, because not doing that meant the entire economic system would have collapsed.
It’s not clear to me what that collapse would have looked like to ordinary people. Certainly radical changes, usually downward, in prices of all sorts of things, no chance of borrowing money, nothing of any interest available in stores, and a big increase in theft, graft, and fraudulent behaviour by everybody. I guess … Lanchester says several times that Canadian banking regulations were much less permissive and therefore banks required comparatively minimal bailouts. But of course Canada is a little boy on the field among the world financial professional athletes, and our fortunes rise and fall with those of the big guys scoring goals or not, mainly the United States.
Lanchester wasn’t happy with what happened in 2008 but he was also worried about what he thought might be happening next. For sure it looked in 2010 like the major Western capitalist liberal democratic governments and their taxpayers couldn’t rescue “the system” from another meltdown, having got themselves so deeply in hock with the last one. What would that mean? Could I or anybody hedge against that? Would “black swan” investments like put options even be recognized in the chaos? I’m not sure who knows but I’m sure I don’t.
It’s more than just saddening that the next capitalist- or bank-driven catastrophe might lead to the end of the trajectory of capitalism as we know it. There has always been a tension, a sustainable and in some ways healthy tension, between people people and money people, approximately the left and the right as we popularly understand them. But that polarity has become as stark as black and white, and as Lanchester says “capitalism has found a deadly opponent, but the problem is that the opponent is capitalism itself.” Not hippies and wets, tree-hugging and political correctness, but its own love for money money money. Many ordinary people of whatever political stripe (including me) want material comforts, and so are at least lightly infected by the same bug.
Paraphrasing John Maynard Keynes describing an ideal future attitude to the love of money, Lanchester says, “The love of money as a possession—as distinguished from the love of money as a means to the enjoyments and realities of life—will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disorder.” Good luck realizing that zeitgeist.
I don’t imagine even Keynes could have foreseen today’s culture and banks and today’s problems, and suspect he wouldn’t have a solution to what might be an unsolvable problem. I’m going to go after more current nonfiction on this topic. 9.0/9.1.