Busted: Stories of the Financial Crisis
For all the fame surrounding Milton Friedman, Ayn Rand and Alan Greenspan, their contributions to a political economy of modern capitalism are minor in relation to those of Friedrich von Hayek, a founder of the Mont Pelerin Society and prophet of the "price signal." A striking and original intellect, Hayek argued that something's market price is not simply what it would cost you but a kind of information used to allocate goods and services most efficiently within the social matrix. Because centrally planned economies lack a mechanism to price commodities correctly, they are unable to put things where they need to go. Individuals wouldn't get what they desired; the larger economy would be unable to balance production and consumption, supply and demand. Shortages would appear cheek by jowl with surpluses. This would have disastrous and eventually fatal consequences, not only for the market but for the lives of its subjects.
The free market, contrarily, able to revalue every object with supple velocity according not to some ideological program but the aggregate will of the people—not just the invisible hand but the invisible spirit, as it were—was more suited not simply to survival but to individual freedom. Hayek's case, best known from The Road to Serfdom (1944), remains the most rigorously persuasive brief for twentieth-century capitalism in its long, acrimonious and cordite-scented war against every other form of life. At the time, the 1989 collapse of the Soviet bloc, and the discrediting of its economic hypotheses, seemed to confer on Hayek's insight the aura of truth.
And yet, having triumphed more or less absolutely, the American model of capitalism has proved itself to be catastrophically lacking in the very balance that Hayek suggested was its singular virtue. The boom-bubble-bust cycle grows ever swifter and more calamitous. The latest crisis bests Black Monday of 1987, the Asian contagion that threatened the globe in 1997–98 and the bonfire of capital that was the tech collapse. It is already well remarked as the worst in eight decades. Each day (and especially each employment report) affirms that it is not at all over; that hopes for a swift recovery are somewhere between optimistic and delusional; and that it may yet surpass the Great Depression, possibly bringing to an end the century-long global domination of the United States.
In the big picture, this imperial denouement is the money shot; we have not yet reached that climax. Nonetheless, it is to be expected that reams of paper and no small amount of server space have already been devoted to parsing the events and partial outcomes. These accounts arrive from several professional strata: journalists, historians, economists, policy wonks, even philosophers (see, for example, Slavoj Zizek's cheerfully messy and ineluctably provocative pocket book First as Tragedy, Then as Farce).
Exemplary among the journalistic is John Lanchester's awkwardly titled I.O.U.: Why Everyone Owes Everyone and No One Can Pay. The title is in part awkward because its significance is never paid in full, as it were; more on that later. Lanchester is a much admired novelist and contributing editor to the London Review of Books, which has featured some of the finest grapplings with the crisis (the essays of Donald MacKenzie deserve particular attention). But I.O.U. most strongly resembles not print journalism but the radio variety—specifically, the National Public Radio podcast "Planet Money." This is not a bad thing. The offshoot of "The Giant Pool of Money," NPR's early foray into crisis explication, "Planet Money" has a flair for the domestic analogy that can help nonexperts understand the obdurately complex instruments and operations of contemporary finance.
Such analogical virtue can be analytic vice. When one converts, say, collateralized debt obligations and credit default swaps into a folksy story about the neighbors and their home insurance, the crisis appears more legible than its components, those acronymic phantasms of fictitious capital traded by the blind protocols of shell companies hoping to arbitrage a few billion pennies from minuscule imbalances in a great global system. But such personalizing can lead to a humanist dead end—now we are compelled to pious outrage over the bankrupting of Becky and Jack, especially if we have just heard them interviewed on-air. All we want is for them to be made whole. The effort to grasp the malignant, impersonal structure of the crisis goes by the wayside.
Lanchester navigates this terrain nimbly. As a primer on these "weapons of mass destruction" (an appellation for which Warren Buffett gets much credit, obscuring the heft of Berkshire Hathaway's derivatives portfolio), I.O.U. is terrific. Here is a moment of signal clarity: "Banking does not just involve the management of risk; banking is the management of risk." He continues:
A big component of that risk is how big to be. In practice, that means how much bigger your liabilities can be than your equity. This is known as "leverage".... During the boom, the leverage ratios of the big European banks—the multiple by which their assets exceeded their equity—reached a point where they were the financial equivalent of bungee jumping.
The elaborate entanglement of instruments leveraged into such mad motion condenses into a clearheaded story of the Joneses, Smiths and Wilsons. Even better, Lanchester's move to analogy is often enough a way of reversing out of the human-interest cul-de-sac. He ends this passage with an explanation of the credit default swap, which, "invented as a way of making lending safer, turned out to magnify and spread risks throughout the global financial system." His punch line is a knockout: "It's as if people had used the invention of seat belts as an opportunity to take up drunk driving."
A couple of years on from the precipice of September 2008, the urgency to pierce the veil of these alchemical financial instruments has somewhat eased. Certainly they are opaque, and intentionally so, it turns out: the better to lure overconfident, underinformed investors during the postmillennial credit run-up that drove the vertiginous climb in property values. But basically, they were credit schemes that seemed to advance gold against dung. And people took the credit, and people bet on the credit, and people bet on (and against) the credit issuers and credit resellers and credit insurers, and most of all they bet that there would be more borrowers and more bettors coming along behind them. Except by "people" I mostly mean corporations. And vast funds, and municipal and state entities.
The rage to understand the intricacies of these shenanigans is understandable. But in trying to grasp what happened, we must finally be concerned with the larger dynamic that drove so many to sell these instruments; and so many to buy them; and so many to applaud, marvel and cheer. The Mont Pelerin Society's first stated aim in 1947 was, after all, "the analysis and exploration of the nature of the present crisis so as to bring home to others its essential moral and economic origins."