Economics

Debt of No Honor

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Among the more trenchant touches in John Lanchester’s study of the financial bust is his framing of the new finance as Wall Street’s answer to post-modernism. Wall Street, too, in Lanchester’s account, engineered “a break with common sense, a turn toward self-referentiality and abstraction, and notions that couldn’t be explained in workaday English.” If post-modern art has often seemed like an arcane conversation among the cognoscenti that was meant more to confuse the onlooker than to satisfy or inform, one could barely say less of collateralized debt obligations (CDOs) and the welter of alphabet securities that underlay the new finance. The parallel should not be pushed too far, but Lanchester is right that the financial crisis sprang from the esoteric principles and practices of an insulated elite.

Wall Street has been so smitten with itself that it lost sight of the purposeto provide credit and capital to the rest of us, remember?that society entrusted to it. Lanchester, a British novelist and a banker’s son, excels at recalling, in comprehensible terms, this originaland betrayedpurpose. If his penchant for metaphor occasionally leads him off the rails, more often he spots latent truths that conventional banking reporters miss. Thus he nicely observes that ATMs, with their creation of “frictionless” and seemingly ownerless money, can induce a frightening vertigo; and that Alan Greenspan was so robotic in his defense of new financial instruments that he sounded like “a computer program written to impersonate [what] Alan Greenspan would have said: Free market good. Trust free market.”

Though he is essentially a tourist to his subject, Lanchester understands perfectly that the man behind the curtain was no wizardthat markets, far from being God-given instruments of perfection, were human constructs. He understands, too, that the precision embedded in financial models was a false precision, and that the idea that risk could be “boiled down to a [single] number” fatally endowed practitioners with an undeserved confidence. And the central error of the era, Lanchester suggests, was cultural. Quoting Senator Byron Dorgan, whose prescient warning went unheeded, “The culture is that Wall Street knows best.” The corollary was that the market was “magically self-regulating,” and thus not in need of government regulation or adult supervision.

Lanchester sees the flaws of bankers in cultural terms as well. They and the other troubadours for the new finance errantly believed that ordinary people thought like experts didor as they imagined experts did: arithmetically and flawlessly. But since most people are neither experts nor computers, millions of them mortgaged their homes for more than they could afford. He frames the greed of bankers by correctly pointing out that no sooner is a regulation crafted than bankers set to figuring ways around it. This observation is hardly new, but Lanchester delivers it with added force by contrasting financiers with health care workers: “Doctors don’t, for the most part, pride themselves on saying ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’”

As such examples suggest, the author is adept at explicating financial complexities with street-level analogies. The parties to a swap contract are likened to two homeownersone with a fixed mortgage, the other with an adjustable ratewho decide to assume each other’s obligations. And the responsibility of central bankers to prick a financial bubble (something Greenspan refused to do), even if it leads to an economic downturn, is likened to “the management of forestry in a hot, dry country.” Better a succession of small, manageable fires than an uncontrollable blaze.

Lanchester’s most original thesis concerns the impact of the Cold War’s decisive finale: metaphors are not always illuminating. He argues that, in the West, the failure of communism spurred deregulation and the consequent financial boom. Previously, the West and the East had staged an ideological beauty contest, and the West, not wanting to seem hard-hearted, softened capitalism with the elements of social democracypublic health care, welfare and so on (Lanchester is writing of Europe as much as of the United States). Thus, “The jet engine of capitalism was harnessed to the oxcart of social justice.” Then the Wall came down and the Westparticularly Britain and the United Statesfelt free to pursue pure, unmitigated capitalism.

It sounds brilliant, but is it true? The end of communism did cast a pall over liberalism. But deregulation, as Lanchester notes elsewhere, began with Reagan and Thatcher, well before the humbling of communism in 1989. And in the United States, the housing bubble was spurred by the government’s attempt to promote mortgages to the massesthe very sort of socially minded policy that Lanchester says was disappearing. Even more of a reach is his notion that the United States and Britain have high home-ownership rates compared to those on the Continent, because our societies, more freewheeling and capitalistic, breed in people a need “to feel secure within their own four walls.” Lanchester imagines that he has solved a paradox, but he is over-thinking: it seems perfectly natural that in societies where people gamble on finance they would also gamble on real estate.

And a few of Lanchester’s observations are so loose, and so unsubstantiated, that they seem lazy. Of Iceland’s boom, “most of [the] money seems to have been spent on fancy cars.” Of departed homeowners, “nobody knows where they go.” This is not analysis; it is a literary journalist typing. And yet I.O.U. contains some original and insightful views on the financial collapse. Lanchester hopes that the crash may serve as an opportunity to reflect “on the whole question of what our societies had as their goals, where capitalism had brought us.” He hopes that reformers will go past mere re-regulation and ask some big questions about our culture of money and short-term greed. In his quirky and often spot-on book, he has begun to do just that.

Roger Lowenstein is the author of the forthcoming The End of Wall Street.

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