The books cashing in on the crash
When the masters of the universe came crashing down to earth last year, the reverberations were felt far beyond Wall Street and the City. Sean O'Grady surveys the best of the books that explode the myth that greed is good
Friday 20 November 2009
One of the few welcome consequences of the global recession has been a modest upsurge in economic literacy, or at least interest. That's not to be exaggerated; most people still don't know their asset-backed securities from the elbows, but at least we're making some attempt to redress that deficit of understanding.
No previous economic crisis has brought forth such a crop of words – over 3,000 new books, a few more reprints, trillions of column inches of newspaper, magazine and web pieces, official reports, not to mention a Facebook page devoted to "Recession Survivors" and those Twittering and blogging their way to an understanding of seismic changes. OK, it isn't much to throw into the balance when you have mass unemployment, the derangement of national finances and the destruction of the world's banking system on the other side, but at least we are creeping towards some acknowledgement of what went wrong, and why. That's something.
So, what to read? A bit like the bewildering complexity of "exotic derivatives" that helped to get us into this mess (and which the bankers themselves never understood), the choice seems endless. It really boils down to which of the three prevalent treatments of the crisis you prefer: the anecdotal, the analytical or the apoplectic.
For apoplexy, little beats Larry Elliot and Dan Atkinson's The Gods That Failed: How the Financial Elite Have Gambled Away Our Future, though I'd take issue with how much of the bankers' "reckless lust for big bonuses and bigger profits" is that novel. More analytical, though still spicy, is Vince Cable's The Storm, from an economist blessed with a politician's gift for explanation and an eye for the telling quote, as when he cites Karl Marx's chilling prophecy from Das Kapital (still in print): "Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and mechanical products, pushing then to take eon more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the state will have to take the road which will eventually lead to communism." We have been warned.
On the analytical end is also John Cassidy's How Markets Fail and The Trouble With Markets by Roger Bootle, equally thoughtful and engaging. The Two Trillion Dollar Meltdown by Charles Morris picks its way through the origins of the US "sub prime" crisis and the creation of strange, and now worthless, securities by the US banks. Amusingly, the first edition was called Trillion Dollar Meltdown.
Refreshingly brief and to the point is Nobel Prize winner Paul Krugman's The Return of Depression Economics, which does it all in 191 uplifting paperback pages – "I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men".
No doctrine has been rendered more obsolete than the free-market neo-liberalism of the investment bankers and their allies in government on both sides of the Atlantic. It is this truth that gently but persistently pokes through all the time in the undisputed current king of the anecdotal hill, Andrew Ross Sorkin's Too Big to Fail. This serves as an extremely readable second draft of history (allowing the newspapers their traditional role as first daft of history, this crisis probably being the last where they will fulfil that function). The sheer opulence of its detail – such as the story that the Lehmans' team watched the British movie The Bank Job in their private jet after an abortive attempt to sell their busted flush of a bank to the Koreans – will not be bettered for years. It would make a fine screenplay for the currently mooted sequel to Michael Douglas's 1987 classic Wall Street: "Greed Is Good" is evidently a slogan that applies to most bankers most of the time. Too Big to Fail has shaded the previous read of choice, Gillian Tett's Fool's Gold, though she spends more time explaining things, laudable in its way but never a good idea in a thriller. In The Crunch, Alex Brummer does his best to make the fall of Northern Rock as exciting as what happened in the states, but the Rock ain't Lehmans.
Even for those of us unfamiliar with the mores of the investment banking classes on Wall Street, Too Big to Fail offers remarkably few real surprises. One knew instinctively, surely, that these now former masters of the universe were, usually, foul-mouthed, obsessed by personal aggrandisement and, too often, not up to the job. But it was ever thus. Newly returned to the best-seller lists, and never out of print in its 54-year career, John Kenneth Galbraith's The Great Crash 1929 reminds us that avarice was not an invention of the21st century, nor was an official tendency to wishful thinking and nor was the financiers' instinct to pursue profits at any cost – literally – to the rest of us. Bankers in the Noughties, in other words, were not noticeably more stupid or arrogant than their counterparts in previous crisis in 1980s, the 1920s or the Edwardian era, say. They just had more money to pay with. That much is also apparent from the curiously enthralling The Panic of 1907, by Robert Bruner and Sean Carr, and Charles Kindleberger and Robert Aliber's Manias, Panics and Crashes. That the public is no less naive or greedy than ever it used to be is also the inescapable conclusion of the classic Extraordinary Popular Delusions and the Madness of Crowds, a history of popular insanity by the Scottish journalist Charles Mackay, first published in 1841.
Indeed, there is something frighteningly timeless about the greed of the public – rarely condemned by the newspapers or politicians, for obvious reasons – as well as that of bankers. After all, no one forced people to borrow the money successive generations blew speculating in everything from Dutch tulips to Chinese and Russian railway schemes to dot.com shares to condos in Florida to... well, who knows what will be next? This time, the money was loaned to us by the Chinese (thanks to our propensity to import stuff form them), but it could come form anywhere.
In the 1920s, banks happily leant cash to people who wanted to buy a portfolio of shares that looked as they could only ever go up, on a 90 per cent loan to value basis. Unbelievable. A few years ago, individuals could gain access to 125 per cent mortgages on residential properties that were similarly assured of infinite accretion in value. The banks themselves borrowed even vaster sums to invest in the "mortgage backed" and other securities that grew out o f the property boom. This "leveraging" went far beyond anything any individual could usually secure – 30 times the value of the securities they were buying. That, rather than ordinary folk buying homes and flats, is what really fuelled the credit boom (and bust). Unbelievable again.
The lesson, surely, is that the recurring nature and the frequency of such follies, and their mutation into hitherto undreamt of forms, suggests that they are in fact an inherent cost of capitalism, or even human nature – the cost running to tens of trillions of dollars in the current episode. The delusion now would be to believe that any system of regulation could prevent such crises and busts happening again.
When they do, people use bad language. As when you watch The Thick of It, or read Viz, Sorkin's account impresses with creative profanity, here deployed to devastating effect by leading American financial figures. When, for example, Hank Paulson, ex-Goldman Sachs and President George W Bush's last Treasury Secretary, was turned down by his counterpart Alistair Darling in his attempts to persuade Barclays to take over Lehman Brothers, Paulson put the phone down, turned to his coterie of advisers, shook his shaven head and declared that the British had "grin-fucked us". One for Malcolm Tucker, perhaps. It is certainly right up there with a distracted Richard Nixon's "I don't give a shit about the lira", when aides tried to turn his attentions from Watergate to an earlier economic crisis. Nixon's remains the poetic triumph of official profanity.
Like most of the accounts of this crisis, Sorkin's contemporary history is heavily American-centric and preoccupied with the decision by the US authorities to let the investment bank Lehmans fail. Rightly. Almost all the many authors to review the case conclude that this was a terrible, terrible error, a pivotal moment when the financial boat, having listed for months, was finally pushed into capsizing.
Monday September 15 2008 is a date that ought to live in infamy. It was the moment when, as Richard Posner puts it in his clear-headed apportioning of blame, A Failure of Capitalism, the possibility of recession turned into the certainty of depression. The arbitrary, almost capricious decision to allow Lehmans to fall – when other similarly important "systemic" institutions before and since had been the beneficiaries of vast federal aid – was unfathomable. Even at the time it looked careless; that such hard men from hard backgrounds in the big wall street firms – Goldmans, Bears, JP Morgan – wimped out on legal niceties is something that is still hard to believe.
After they decided to make an example of Lehmans everything from Japanese new car sales to activity in the Brazilian construction industry to German industrial investment fell off a cliff. It is fair to say that never before in the history of the world has there been such a synchronised downturn. Apart from North Korea and Somalia, there has been no hiding place. Unlikely victims included Iceland, Ukraine and Australian and Norwegian pension funds. The noise that Lehmans made when it fell to the ground reverberated across the world; even the most blasé of businesspeople and consumers noticed the earth shaking beneath their feet, and, lo, they grew biblically fearful. Global confidence evaporated.
Lehmans was supposed to be a powerful example to the bankers that they wouldn't be bailed out: the damage it inflicted has instead proved to them that they will always be bailed out, no matter what risk they take. This "moral hazard" is now a fact of life. Lehmans was truly no end of a lesson. Only the contrarian Niall Ferguson, whose The Ascent of Money is a majestic affair, as you'd expect, begs to differ from this emerging consensus. Again, as you'd expect.
Still, while they fouled up on Lehmans, the authorities did then get real. And were it not for some bold action by the world's governments and central bankers since then, things might have been far, far worse – another Great Depression.
So how did this bold action come to pass? Through reading books, you could plausibly claim. It is a constant source of amazement to me that so many senior figures in business and journalism I meet know or care so little about economic or financial history, and ridicule those who do. When a senior business journalist turns to you blank-faced and asks, "What's Bretton Woods?", as happened to me recently, you fear for civilisation. Just as well, then, that Ben Bernanke, head of the U S Federal Reserve is a distinguished scholar whose Essays on the Great Depression is still on sale, while Mervyn King, Governor of the Bank of England, is another professorial type, an former academic with a healthy interest in financial history. From their studies of depression-era economics, and more recent experience in Japan and of banking crises in the Nordic nations, came some simple lessons; act, act fast and act with great force. They did. They saved the banks, and the world. Gordon Brown to deserves some credit for that, too, though he may have to wait for the history books to grant it to him.
Today, King, Bernanke, Trichet of the European Central Bank and others have learned the lessons of their predecessors' mistakes. Of these, Alan Greenspan, chair of the Fed form 1987 to 2006, and hailed on his retirement as "the greatest central banker in history", is another focus of attention for the chroniclers of our times. Rarely has a public reputation been trashed so comprehensively and rapidly. Whereas a few years ago sycophantic volumes with titles such as Maestro (that was Bob Woodward's) were the staple read on Greenspan, now there are books devoted entirely to his errors such as "Greenspan's Bubbles" by William Fleckenstein. Paul Krugman's book has a chapter scratching away at Greenspan's fatal flaw – that he always cut interest rates at the first sign of any trouble in the markets, thus making investment, first in shares and then in real estate, a one-way bet – the "Greenspan Put" in the jargon. Thus, while Greenspan warned about these bubbles – "irrational exuberance" as he famously called it – he did nothing to stop things getting out of hand. Once a monetary messiah, his name is now mud, the architect of our misfortunes. That seems unlikely to change, even with his own substantial volume of memoirs, The Age of Turbulence: Adventures in a New World, in circulation.
In Lords of Finance, the gifted economic historian Liaquat Ahamed tells the story of an earlier generation of powerful central bankers who, while rich in native cunning, possessed little or no economic wisdom, and made even worse errors than Greenspan, ones their modern counterparts have eschewed. Montagu Norman of the Bank of England, Hjalmar Schacht of the German Reichsbank, Benjamin Strong of the Federal Reserve and Emile Moreau of the Banque de France were legendary, fascinating personalities – but hopelessly out of their depth in the run up to the Great Depression, as were other contemporary officials. Like President Bush, the Depression-era President Hoover had a former investment banker as his Treasury Secretary, Andrew Mellon. And it was Mellon who advised the president to "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people", when things turned sour after the Wall Street Crash. It didn't work. Mellon was later impeached on charges of high crimes and misdemeanours, a fate that seems likely to be evaded by Hank Paulson, let alone Dick "the Gorilla" Fuld or our own Fred "the Shred" Goodwin, of the knackered Lehmans and Royal Bank of Scotland respectively.
As ever, Keynes lights the path to economic enlightenment. Robert Skidelsky's superb short new biography, Keynes: the Return of the Master, shows us how revolutionary was Keynes thinking in the 1920s and 1930s, and how, until now, it was never properly applied. This biography succeeds, as do all the best books on the crisis of 2008, in living up to the maxim set by Keynes's tutor Alfred Marshall, and often quoted fondly by Keynes's nemesis, Milton Friedman: "Experience in controversies such as these brings out the impossibility of learning anything from facts till they are examined and interpreted by reason; and teaches that the most reckless and treacherous of all theorists is he who professes to let facts and figures speak for themselves."
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