No loss in the telling
Two books to understand the financial crisisbooks Updated: Dec 23, 2011 16:37 IST
Rs 599 pp 212
Rs 699 pp 514
Each financial crisis spins out its own industry of research extending well beyond its era. Those inside a bubble are usually too busy making or losing money to take time off and warn the unsuspecting mob. I can calculate the motions of the heavenly bodies, but not the madness of people, Isaac Newton is reported to have commented about the South Sea bubble. He lost £20,000 in that particular piece of madness.
Stray I-told-you voices thus acquire a cachet reserved for more dispassionate study. The doomsayers stock goes through the roof on doomsday. So from the authors of international bestsellers like The Big Short and Traders, Guns and Money, appear a brace of sequels that travel with the sub-prime crisis as it engulfs currencies and continents.
Michael Lewiss Boomerang is the journalistic effort, asking, as the book jacket says, why Icelanders wanted to stop fishing and become investment bankers. The Greeks wanted to turn their country into a piñata stuffed with cash and allow as many citizens as possible to take a whack. The Irish wanted to stop being Irish. The Germans wanted to be more German (His) investigation of bubbles across Europe is brilliantly, sadly hilarious.
In Extreme Money, Satyajit Das dons a professorial cap to weave financial history and popular culture into an entertaining and blistering social critique of how so many have come to chase endless financial reflections of the real economy You know when Lewis Carroll, Max Weber, Alan Greenspan and Sigmund Freud all appear on the same early page that you are about to read an intellectual tour de force.
Now, the publishing promos are not inexact, and if youve lost your job and house, hilarity and intellectual succour are what you may be most in need of. If, in the bargain you get to understand why you lost it all, a bestseller is born. Lewis worked for Salomon Brothers as a bond salesman and Das at Merrill Lynch. They both became stars after their first books that trawled dealing rooms to throw up anecdote after anecdote it does get overwhelming after a point to drive home the point: leave the casinos to the gamblers.
It is not only the guy who lost his shirt that is seeking answers. Governments now have some idea about how herds work. The group of twenty biggest economies is in the process of framing an oversight regime that should prevent the recurrence of the Great Crash of 2008. The process is heavily influenced by the work of Thomas Schelling, an American economist who studied why rational decisions by individuals can lead to irrational behaviour by a group of people.
The financial market is now being seen as greater than the sum of its parts with a varying appetite for risk over time. It may be individually appropriate for banks to take more risk during benign economic times. However, when this behaviour is widespread, the overall leverage of the banking sector may create the potential for financial instability. In short, dont just look for the weirdos, check if the system is acting weird as well. Likewise, by building up prudential buffers during the benign phase of an economic cycle, when it is easier and cheaper to do so, banks can enter more challenging times from a stronger position. Again, one set of rules for fear, another for greed.
For a worms eye view, Lewis and Das do serve as a critical bridge till more polished explanations about the crisis of 2011 acquire currency. Boomerang is the more focused product, Lewis having travelled to Europe with a journalists brief for studying the crisis in the euro zone. He brings back a scary picture of how perilously close some states and cities in the USA are to the predicament faced by, say, Greece. Extreme Money, in contrast, reads like a scree of sharp financial practices, Das taking a bit too seriously his self-acquired role of armchair theorist. Pick up Boomerang at the airport; Lewis gets his point across in half as many, and better chosen, words as Das does.