If you want to understand the banking crisis, you should go to the theatre. Two wonderful plays, Enron by the young writer Lucy Prebble and The Power of Yes by the well-established David Hare, tell you all you need to know. Enron opened in Chichester in July and then transferred to the Royal Court in London. This run has been completely sold out but it will start again in the West End in January. The Power of Yes opened at the National Theatre on 29 September.
Imprudent trading by the banks created simultaneous bubbles in financial market. These bubbles were a global phenomenon. Their deflation took roughly 18 months – from August 2007 to March 2009. As a result, the stuffing was knocked out of economic activity. But most of us have never been in a bubble. We hear of them but we have never participated.
I have always believed bubbles are created by greed accompanied by a sort of blindness so that warning signs are missed. As a character in Enron puts it, speaking directly to the audience: "There's a strange thing goes on inside a bubble. It's hard to describe. People who are in it can't see outside of it, don't believe there is an outside."
There is also an obsessive edge to speculative markets. Ms Prebble catches this when she has Jeffrey Skilling, the chief executive now serving a long prison sentence, ask a colleague: "Seen the stock price today?" She replies: "I see it everyday. I see it in the elevator. I see it on the walls. I see it on my desk." This was literally true. In the Enron headquarters in Houston, Texas, it was almost impossible to avoid large screens showing second by second the Enron stock price.
There is strong peer pressure, too. In Mr Hare's piece, a private equity investor explains: "Once you're in a bubble, it needs nerves of steel to stay out. Can you imagine the pressure? On any trader? Everyone round you is making money... and you're the one who says I don't believe in securitised credit arrangements?"
Mr Hare's George Soros character is the most interesting, however, because the author has found the secret of his success, which is to exploit bubbles but somehow never be caught up in them. The Soros character says of bubbles: "They're not irrational. When I see a bubble coming, I'm thrilled. I participate. I buy the stock... It's how I made my money."
The play Enron well describes the seductive process of transforming a business from doing something that customers want to one that is conducted solely in the financial and commodity markets, going from solid reality to virtual reality. The chairman, Ken Lay, asks a board colleague: "You got a vision for the company Claudia?" And she answers: "The international energy company. Enron: delivering gas and oil to the world." And Skilling immediately interjects: "That's a parochial vision! Ask me. I would trade."
The chairman asks: "What do you see us trading, Jeff?" Skilling replies: "Energy. Sure we make it. We transport it. We sell it. Why don't we trade it? You gotta pull back and look at this thing from above. Why do we even have to deliver the gas at all?"
The same thinking transformed many banks, among them the largest in the world, into giant speculative businesses. From the outside they looked like banks. Now doubt Enron seemed to be an energy company. But inside it had become a trading machine. Barclays is a hedge fund with a conventional bank wrapped around it.
We blame regulators for having omitted sufficient checks and balances. But there was an additional factor, not knowing the past, which Mr Hare's play captures. An industrialist speaks to the audience and says that once upon a time "there was a cultural memory about what happens when risk gets out of control. And then that generation passed. A new generation had no memory".
But a young man comes on to the stage who knows how to read history: He remarks: "One of the things I noticed was the people who didn't believe in the bubble – look at their names – Nouriel Roubini, Nassim Taleb – they come from societies which periodically collapse. Iran, Lebanon."
It's hard to overstate the importance of knowing some history. I understood early how serious the banking crisis might become because the shadow banking that had developed reminded me of the unregulated financial markets of the 19th century, a feeling confirmed when the run on Northern Rock developed, something we hadn't seen since the 1860s.
Reading history may be as valuable as the rulebooks of the Financial Services Authority.Reuse content