I.O. U.
By John Lanchester

If reports are to be believed, and the subprime mortgage meltdown of 2008 (to give it just one of its names) really was the herald of the Worst Economic Crisis Since the Great Depression, then we might expect to read many more accounts in coming days of what went wrong. There have been plenty of books on the subject already, insider's tales, journalistic takes, and even a quick release by heavyweight Richard Posner (A Failure of Capitalism), but so far John Lanchester's I.O.U. stands out, if not for its perceptiveness and insight, then at least for the quality of its writing. A well-known novelist (I reviewed Mr. Phillips several years ago) and non-economist, Lanchester tells the story from a layman's perspective for other laymen. This is important because, as he puts it, there is a "gap between the world of finance and that of the general public and . . . there is a need to narrow that gap, if the financial industry is not to be a kind of priesthood, administering to its own mysteries and feared and resented by the rest of us."

The short answer to the question of what went wrong is: Everything that could have. A culture of greed, a political climate of permissiveness, worthless mathematical models of risk, a skewed system of incentives - they all played their part. Catastrophic failure was, in turn, what we should have expected based on the operation of Murphy's Law. Complex systems have a way of breaking down, with the likelihood of breakdown increasing with their complexity. The subprime mortgage market was a very complex system, much of it deliberately opaque and incomprehensible even to its inventors. Acronyms like CDS (credit default swaps) and CDO (collateralized debt obligations) were only part of it. The entire system was divorced from reality, having been devised to run like a computer program. (Which is, in fact, the way a lot of stock trading is done these days. Humans have even taken to trying to imitate such theoretical purity in adopting methods of "technical analysis" when building their own portfolios. But that's another story, and one Lanchester doesn't get into.)

What got the whole mess started, according to Lanchester, was the collapse of communism and the subsequent two decades of capitalism's "victory party." With its great enemy vanquished, liberal democracies didn't even have to pay lip service to questions of how to provide better lives for ordinary people. The "jet engine was unhooked from the oxcart [of social justice] and allowed to roar off at its own speed." Which made a lot of people rich, just as it was supposed to.

That said, I had a saddening, double-barreled response to Lanchester's comment that there were "two big things wrong" with the post-Cold War boom: "it wasn't fair and it wasn't sustainable." My first response was that anyone today who thinks that life, at any level, is even supposed to be fair is either (a) under the age of eighteen; or (b) mad. That ideological battle was lost a long time ago. But what I found discouraging, upon further reflection, is that the same could probably be said for anyone who thinks that there is anything sustainable about Western, industrial, modern civilization. It's not just that capitalism is a system that may be expected to go boom and bust. It's that we know we can't possibly go on like this, and that we probably couldn't change course now even if we wanted to.

Lanchester ends the book with James Lovelock's comment that what the world needs is the equivalent of a "small heart attack" to shock us all into more responsible, environmentally sustainable lifestyles. So far that hasn't happened, leaving us in the frog-in-the-cooking-pot scenario. The credit crisis, Lanchester thinks, was "capitalism's equivalent [of the small heart attack]. . . . the point at which we all have a chance to take a look at ourselves, our banking systems, and our politicians and make some changes."

We haven't, and I agree with Lanchester's dismal assessment that such a reappraisal will probably never happen. Small heart attacks won't be enough. Sometime, rather sooner than later I suspect, we're going to have to deal with the Big One.

Notes:
Review first published February 22, 2003. Throughout the book Lanchester holds Canada's banking system up as a better alternative to the British and American models. It's hard to take much pride or comfort in this, however, seeing as our stricter regulations were only the result of a historical accident and in the case of any further collapse we would have certainly gone down along with everyone else.

BACK