“I.O.U. Why Everyone Owes Everyone and No One Can Pay” by John Lanchester (Simon & Schuster).
Hot off the press and on the 2-week shelf at the local library, this book sets itself the goal of explaining the 2008 mortgage crisis so everyone can understand it. Does a pretty good job, too. Lanchester has a wonderful wry sense of humor that he deploys every once in a while to hold your attention. Example: “…if it wasn’t, well, then, the head of the Bank would have to… would have to… would have to jolly well write a letter to the chancellor to explain why it wasn’t.” Veddy British, wot, wot? Even the chapter titles: “The ATM Moment”, “Rocket Science”, “Enter the Geniuses”, “The Mistake”, “Funny Smells”, etc. are witty. Great mnemonics, too. “The ATM Moment” introduces the crisis with the moment Rakel Stefansdottir found her ATM card no longer worked. “Rocket Science” and “Enter the Geniuses” describe the flawed mathematical models that were supposed to manage financial risk, and points out how few “experts” actually understood what the models even were: “Gaussian copula” — the term alone sounds vaguely pornographic. Chapters titled “Boom and Bust” and “The Mistake” pinpoint precisely how supposedly intelligent bankers could so horribly underestimate the probability of a systemic collapse, and “Funny Smells” describes the failure of regulators to squelch the madness.
So, in a nutshell, the problem started when bankers were seduced by mathematics. They thought, with the right formulas, they could quantify risk — predict the future, as it were. Duh. They pushed for ridiculous amounts of deregulation and, astonishingly, got it. They took a reasonably clever (if somewhat sleazy) idea: the CDO (Collateralized Debt Obligation), and squared it, creating a ticking economic time bomb. In short, they got greedy, and took advantage of other peoples’ greed and credulity to sell off hideously dangerous investments behind the mask of top-of-the-lien (hey, look! a typun*!) AAA bond ratings.
Lanchester reserves his most scathing comments for those who make a religion of laissez-faire economics, citing research by Kanemann and Tversky that proves — mathematically proves, I say! the falsity of the “…central shibboleth of contemporary academic economics. The assumption of rationality…” Intelligent markets, pah! Bubble-prone, charlatan-laced, hyper-emotional, dysfunctional markets, is more like it.
In the end, Lanchester’s prescription is simple. Remember that, if the system allows room for abuse, someone will abuse it. If the system makes it possible to hide dishonesty and criminal antics, someone will do just that. And, for whatever reason, the human race will always breed greedy grasping bastards who don’t have the brains to realize when enough is enough.