Thursday, April 22, 2010

John Lanchester - Whoops!: Why Everyone Owes Everyone and No One Can Pay (2010)

Knowledge may be power, but sometimes acquiring that knowledge seems too tiresome a task. In this light – and given that my professional life increasingly involves knowledge about global finance and economics – I’ve been attempting to get past the usual click:off response that my brain has in regard to anything about economics, in order to try to actually gain some understanding of the way power structures in the world operate, inseparably intertwined as they are with financial issues.

My first foray into this field was Joseph Heath’s Filthy Lucre: Economics For People Who Hate Capitalism, a slightly misnamed book given that its premise was the debunking of influential economic myths from both the right and the left, but nonetheless an interesting and informative read. My next step into the labyrinth of boring and incomprehensible jargon that is economics – not known as 'the dismal science' without reason – was John Lanchester’s new book (published in the US as I.O.U), which belies that discipline’s often well-earned reputation.

One of my problems with trying to understand these issues, as someone with a background squarely in the humanities and, to a lesser extent, the social sciences, is that even if I look up basic explanations of particular financial instruments (presumably so called because we all get played) on Wikipedia, I have to back up four or five pages in order to understand the concepts behind them. The issue here is that it’s an entirely different discourse, with all kinds of assumed underlying knowledge – I imagine mine is a similar sensation to what an economist would feel reading, say, Can The Subaltern Speak? or The Archaeology of Knowledge (i.e. this is boring, pointless, jargon-filled cobblers). The point regarding postmodernism is one to which I’ll return – but Lanchester’s book is a different story altogether. Lanchester is a novelist – his first book, the delightfully black The Debt To Pleasure (which won the Whitbread) is a particular favourite of mine, but I also enjoyed his others, Fragrant Harbour and Mr. Phillips. So when I heard that he had unexpectedly written a book on the Global Financial Crisis (GFC), I thought it might be a good place to continue my conceptual pursuit of Mammon. The book has its genesis in Lanchester’s research for a novel involving aspects of the GFC (and Fragrant Harbour, a novel of Hong Kong, was partially concerned with the human impact of global finance as reflected in that deeply trade-focussed city), and a prescient article which he wrote just before the GFC broke.

Given this background, Lanchester’s is a lucid and blackly humorous introduction to the processes which made the GFC possible, from an outsider’s perspective which doesn’t assume any previous familiarity with – well, anything he talks about, really. I now understand derivatives - options and futures, collateralized debt obligation, credit default swaps, securitization and a host of other nasty acronyms (the book could’ve used an acronym index). And I understand what actually went wrong with the financial system (if one makes the, in my opinion incorrect, assumption that it was somehow right before any of this happened). And basically, it was this: it became entirely postmodern.

The arcane nature and mind-boggling mathematical complexity of economic processes is not just incidental; it’s actually a central part of the reason why a catastrophe like the GFC could occur. It means that insiders all think in the same ideology – the more risk, the more profit; mathematical models can accurately reflect real-world behavior; limitations on particular types of trade and instrument are imposed by clueless outsiders and are there to be bent and broken (Lanchester suggests that an appropriate metaphor would be if the invention of seatbelts were to be taken as indicating that drunken speeding should now become standard practice). The failure of outsiders to understand these processes, combined with an unwarranted trust based on the shared quasi-religion of neoliberal ideology, meant that governments failed to rein in institutions either before or after the crash – a fact which contributed to heedlessness of institutions fully aware that they were too big to fail (indeed, in complete contradiction to the unfettered free market ideology which supposedly guaranteed the success of the global financial structure, the crash itself simply provided what Naomi Klein calls ‘disaster capitalism,’ a perfect opportunity to transfer more money from the public to the private sector and, despite some sharp but meaningless words, to shore up the lack of accountability of powerful individuals and institutions). This was combined with the arrogance of workers in the sector who are, as Lanchester points out, in immediate touch with proof of their rightness every time they make a successful financial decision, in contrast to most professions, where right or wrong decisions are generally more grey-shaded, less quantifiable. All of these things led to a situation in which those in the industry were completely insulated from any commonsense view of the probabilities and risks with which they were dealing.

But perhaps the most fundamental issue here is the aforementioned fact that finance went post-modern. As new instruments were invented to insure against risk and to ‘leverage’ initial capital into ever bigger sums – which in turn led to incentives to make irrecoverable loans and a drop in the perceived necessity for capital reserves against unfortunate, but now supposedly impossible, market downturns or runs – transactions were no longer attached in any meaningful way to their initial base, while attitude – in terms of bullish projected confidence, optimism and expertise – came to dominate analysis (a trend Barbara Ehrenreich documents in her brilliant work Smile or Die). Thus it was that nobody noticed that it was fundamentally impossible for a complicated system of refracted abstract meaning to transform a myriad of home loans to the destitute into a lasting financial bonanza. In this sense, postmodernist thinking (of which, let it be known, I am by no means a critic) is far from an ivory-tower game of inaccessible and meaningless jargon; rather, it is a reflection of the actual characteristics of the so-called ‘real world’ (if by ‘real’ we mean actually-existing structures of power with massive impacts on global living conditions), and the best tool to use to understand these characteristics.

But the question on everyone’s lips in relation to this situation is: who’s to blame? Those who have an interest in taking the heat off the banks and financial institutions blame politicians or the consumerist public’s insatiable desire for free money and disregard for the future (or, in the most right-wing scenario, China), but the fact is, not one point of this unholy trilogy - a Bermuda triangle into which cash keeps on vanishing - is off the hook. Addicted to consumerist capitalism, the pursuit of happiness through materialism, and lockstep free market ideology, these things are in fact not even separate as such, but facets of the same underlying societal malaise. And while John Lanchester looks mainly at the former, if you’re looking for an introductory explanation to this deplorable state of affairs, there’s no better place to start.

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