Here is a question no one is asking about the global financial crisis: How do we know so little about who or what brought on the crisis after all the literature that has been produced over the last two years. Is it because no one knows anything about the "Invisible Hand" or how long the current crisis will last as we don’t know how deep it is? Or because, as Nobel laureate Robert Solow (1987 for Growth Theory) put it, "the dangerous combination of the ‘real’ recession — the unemployment and idle productive capacity that come from lack of demand — and the financial breakdown, each being the cause and effect of the other, makes the situation more complex, more unstable, more vulnerable to psychological imponderables, and more distant from previous experience?" Put it any way you like, but about 17 causes of the crisis have been identified as John Lanchester says in Whoops! Why Everyone Owes Everyone and No One Can Pay (Allen Lane paperback, Special Indian Price Rs 450).
Of the multiple causes, the main suspects that just about every economist has pointed out are as follows, though not necessarily in the same order:
1. The crisis did not originate in the real sector of the economy. It was triggered by the excesses of the financial system. What stands out glaringly is the regulatory failure in relation to the financial markets. Some parts were either loosely regulated or not regulated at all. Along with this was the failure of the regulatory authorities to understand fully the implications of the various derivative products. The regulators did not exercise the required degree of oversight and control. Therefore, fixing the financial system is the first priority.
2. The persistent current account deficit in the US and the low and declining savings rate in the advanced countries mean they are all living on borrowed money and borrowed time. Unless the US economy is put on a sounder footing, concerns will continue to arise regarding the strength of the dollar which has implications for its use as a reserve currency.
3. Globalisation, which has proceeded at a rapid pace, is a double-edged weapon. While it has resulted in a better allocation of resources, particularly investment among different countries, it has also resulted in accentuation of inequalities among and within countries.
4. While the first three are the fundamentals of the disease, there is a whole cast of minor players who piled in to exploit the regulatory failures to make a fast buck. These were: the predatory mortgage broker who sold loans that most couldn’t really afford; the sleazy real estate agent who kept saying that houses were a good investment because house prices almost never went down; and low interest rates that tempted the middle class to take loans.
All this has been said in different ways in the vast literature that has been published on the crisis, but what makes Whoops! different is the prose. It is lively, readable and plainspoken. Over seven chapters — The Cashpoint Moment, Rocket Science, Boom and Bust, Enter the Geniuses, The Mistake, Funny Smells and The Bill — Lanchester spins out his story in memorable images to clarify complex points of high finance: "The whole idea that a banker looks a borrower in the eye and takes a view on whether he can trust him came to seem laughably nineteenth century."
In chapter two — Rocket Science is a clear exposition of derivatives or the takeover of modern banking by advanced mathematics — Lanchester is possibly at his best. The first paragraph mixes economics with analogies from the humanities: "Finance, like other forms of human behaviour, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts — a break with commonsense, a turn to self-referentiality and abstraction and notions that couldn’t be explained in workday English. In poetry, this moment took place with the publication of The Waste Land... Dance, architecture, painting — all had comparable moments... The moment in finance came in 1973, with the publication of a paper in the Journal of Political Economy entitled The Pricing of Options and Corporate Liabilities, by Fischer Black and Myron Scholes." For the common reader, the intermeshing of literature and finance makes the understanding of complex financial instruments, like credit default swaps that brought down AIG and set off the threat of a chain reaction, so much simpler without oversimplification.
In the course of his exposition of high finance and its discontents, Lanchester raises two questions that the common man would ask. First, what are banks for? Are they meant to serve society or are they there to help us own houses and buy more goodies? Second, since the irresponsible, deregulated banking system was primarily responsible for the financial mess, would stricter regulation be required in future? But would this be a guarantee against the irrationality of human behaviour? The only guarantee against future disasters is to set limits to consumption or, as Lanchester says in his conclusion, to cry "enough". As Gandhiji said long ago, "There is enough for everyone’s need but not for everyone’s greed."
