Wednesday, July 28, 2010

More Summer Reading on the Global Financial Meltdown

After surviving the World Cup (too late to blog about) and a couple of weeks at Calvin College in a seminar on "Faith and Globalization," I've gone back to my summer reading on the causes of the global financial crisis.

This time, I turned to British novelist John Lanchester's I.O.U.: Why Everyone Owes Everyone and No One Can Pay. It's the clearest, funniest, and most helpful examination of the crisis yet. Not only does he do a good job bringing the whole crisis down to earth, explaining it well, but he also thinks clearly about the larger context in which the crisis took place. And he makes the reader laugh along the way.

He correctly observes that one of the biggest gaps of cultures today is between those who understand global finance (very few) and those who don't (most of us). By trying to bridge this gap, he serves both cultures: the culture of global finance experts and the culture of the rest of us.

As I did in my last post, I'm going to focus on the overlapping points in his analysis and my own in chapter three of the book. At several points, he makes observations paralleling those in The Fullness of Time.
  • The collapse of the Communist bloc (pp. 12-24) as the opening for the triumph of global finance (i.e., "the end of history"means that there are no ideological competitors to challenge capitalism).
  • ATMs and "frictionless" money: He starts out his first chapter (not unlike my third chapter), with a story of going to an ATM in Hong Kong with his father in the 1970s and being bothered. "The sheer frictionlessness with which money moves around the world is frightening; it can induce a kind of vertigo" (p. 8).
  • Money as an abstraction: He points out that we have a hard time grasping what money is, until realities intrude on us (pp. 8-9). He even points out that the way that money began to operate was like postmodern theories about the "play of signifers," and so on.
  • The role of arrogance and quantitative abstraction in underestimating risks: In chapter 4 of I.O.U., Lanchester observes how the quantitative "geniuses" were building a system that depended on subprime borrowers:
By 2006, "more than half of all applications for mortgages were either 'piggback' loans, meaning that they were double loans taken out to buy the same property, or 'liar loans,' in which applicants were invited to state their own income, or 'no doc' loans, in which the borrower produced no paperwork. Gee, what could possibly go wrong" (p. 132)?
  • Mathematical abstractions replacing common sense and a concrete sense of what's going on: 
"Consider the case of Lawshawn Wilson in Baltimore, with no job and no income, supposedly making mortgage payments to the trustee who was the ultimate owner of her mortgage, Citigroup Mortgage Loan Trust Inc., 2007-WFHE2. How likely is a problem with that and similar mortgages? Not too unlikely, one would have thought. But by the time the market had finished with its packaging and securitization and CDOs [collateralized debt obligations] and CDSs [credit default swaps, or insurance against failures]  . . . the CFO of Goldman Sachs, David Viniar, described  [it] like this: 'We were seeing things [subprime defaults and collapsing real estate prices] that were 25-standard deviation moves, several days in a row.' It is almost impossible to put into words how big a number 25 sigma is, expressed as odds to one . . . . It's equivalent to winning the U.K. national lottery twenty-one times in a row. That's the probability of a single 25-sigma event. Goldman were claiming to experience them several days in a row" (p. 164) . . . . They weren't just wrong in practice, the way you are wrong if you call heads and a coin lands tails; they were philosophically wrong. They [global financial firms] were exposed as doing something which was contrary to the nature of reality" (p. 167).
  • The failure of regulators to ask simple questions of global financial firms like "I don't understand, please explain"(p. 181)--something that humility and a sense of groundedness in concrete realities might have promoted. Instead regulators in the UK and US trusted firms to police themselves with "market discipline" and instead used "light touch regulation."
  • The difference between the pursuit of money and the practice of industry (similar to the central theme in a recent article of mine):
"There is a profound anthropological and cultural difference between an industry and a business. An industry is an entity which as its primary purpose makes or does something and makes money as a by-product. The car industry makes cars, the television industry makes TV programs, the publishing industry makes books, and with a bit of luck they all make money too, but for the most part the people engaged in them don't regard money as the ultimate purpose and justification of what they do. Money is a by-product of the business, rather than its fundamental raison d'etre. Who goes to work in the morning thinking that the most important thing he's going to do that day is maximize shareholder value? Ideologists of capital sometimes seem to think that that's what we should be doing--which only goes to show how out of touch they are. Most human enterprises, especially the most worthwhile and meaningful ones, are in that sense industries, focused primarily on doing what they do; health care and education are both, from this anthropological perspective, both industries . . . . Money doesn't care what industry it is involved in, i just wants to make more money, and the specifics of how it does are, if not exactly a source of unconcern, very much a means to an end: the return on capital is the most important fact, and the human or cultural details involved are just that, no more than details" (pp. 197-98). 
  • Summing up his thesis
"The credit crunch was based on a climate (the post-Cold War victory party of free-market capitalism), a problem (the subprime mortgages), a mistake (the mathematical models of risk), and a failure (that of the regulators) . . . . But that failure wasn't due so much to the absence of attention to details as it was to an entire culture of the primacy of business, of money, of deregulation, of putting the interests of the financial sector first. This brought us to a point in which a belief in the free market became a kind of secular religion" (p. 202).
When he gets to his final chapter, on where to go from here, he doesn't have a lot to say, but I think we can be hopeful that the god of Mammon failed to deliver on all of his promises, opening us up to hopeful alternatives. The Christmas story provides one such alternative, as it re-enacts (among other things) the paradoxical triumph of humility, concreteness, and embodied relationships.

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