Book review: An outsider’s view of the global financial crisis

Last couple of years has seen books on the financial crisis come out dime a dozen. These books have primarily been written by people who were either part of the financial system that was brought down or journalists writing about it.

But these people were all insiders writing about something they were a part of. George Soros, the hedge fund manager turned philanthropist, has a theory of reflexivity, which states that “people’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole.”
Keeping this background in mind, John Lanchester’sI.O.U.-Why Everyone Owes Everyone and No One Can Pay comes across as a nice change from most books on the financial crisis.

The major thing going in favour of the book is the fact Lanchester is not even remotely involved with the financial services industry nor is a business journalist who has closely covered the crisis.
In fact, he is a British novelist, who was just doing some background research on the financial crisis for a new novel and he soon realised that the financial crisis was the most interesting story he had ever come across.

For an outsider, Lanchester writes very lucidly, never taking the reader for granted and explaining every new term that he introduces. “It seems to me that there is a much bigger
gap between the world of finance and that of the general group and that there is a need to narrow that gap,” he writes. And he does succeeding in narrowing that gap.

The book starts with the fall of the Berlin Wall, the collapse of the Soviet Union, and the end of the Cold War. With this the West won its “ideological beauty contest” with the East and things started to change. “The jet engine was unhooked from the ox cart and allowed to roar off at its own speed. The result was an unprecedented boom, which had two big things wrong with it: it wasn’t fair, and it wasn’t unsustainable,” writes Lanchester.

And once the commies and socialism were out of its way, “there was no global antagonist to point at and jeer at the rise in the number and size of the fat cats; there was no embarrassment about allowing the rich to get so much richer so very quickly.”

From there the banks and the bankers took over, building banks which had assets bigger than the gross domestic product (GDP) of their countries. Take the case of the Royal Bank of Scotland (RBS), which has been in a lot of trouble in the recent past. The total assets for the bank stood at £1.9 trillion pounds, which was more than the entire GDP of the United Kingdom, which stood at £1.7 trillion pounds. And this was a very dangerous situation. Once the crisis stuck, the British government had to intervene to bail out the bank. “The British taxpayer has had to bail out RBS to the tune of tens of billions of pounds: no one yet knows how much the final cost will be, but £100 billion is probably not far off the mark, and it could easily be much more,” writes Lanchester.

Iceland, a country of 300,000 people was even worse off. As Lanchester writes “A country with 300,000 people…and no natural resources except thermal energy and fish stocks suddenly developed a huge banking sector whose assets were twelve times bigger than the whole of the economy.” Of course when the financial crisis stuck and the Icelandic banks went bust, the Icelandic government unlike the British government couldn’t do much to rescue the banks.

The authorities in charge of financial markets played along relaxing regulations which allowed banks to take on more and more risk. This led banks coming up with newer forms of mortgages and lending to people, who they would have never thought of lending to before. As Lanchester writes, mortgages “came into existence because the market set out to find ways to let us fulfil our heart’s deepest desire, to own property. The appetite created the products, not the other way round.”

And of course with all the easy money floating around, people went out and brought property.  Property prices went up and people bought more property. And so the story continued for a while. Banking which was inherently supposed to be a boring business became the stuff which casinos are made of. Of course property prices couldn’t have gone up for time immemorial. Prices crashed. People who had taken out huge mortgages and so were banks.

And then the governments had to step in to bail out the banks. As Lanchester summarises “So: a huge, unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialised. That is literally nobody’s idea of how the world is supposed to work.”

I.O.U. is a brilliant read for anyone, who still hasn’t understood what the financial crisis is all about and is looking for a book which explains it in a simple, lucid and humourous way.