Busted: Stories of the Financial Crisis | The Nation


Busted: Stories of the Financial Crisis

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Regarding origins, I.O.U. comes up short. It's as if one must choose between grace with description or narration, and Lanchester has opted for the former. This is not to say he doesn't proffer culprits. "Accounts of the banking-and-credit crisis tend to focus their explanations, which usually also means their blame, on one or more of the following four factors: greed, stupidity, government, or the banks." He timorously suggests an admixture of the four.

Why Everyone Owes Everyone and No One Can Pay.
By John Lanchester.
Buy this book

13 Bankers
The Wall Street Takeover and the Next Financial Meltdown.
By Simon Johnson and James Kwak.
Buy this book

A Companion to Marx's "Capital"
By David Harvey.
Buy this book


About the Author

Joshua Clover
Joshua Clover (@bookofriot) is a professor at the University of California, Davis, where he writes about poetry...

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In truth, this quatrain offers only a couplet for blame: character and institutions. These two, moreover, are one: the failures of the latter require reference to the former. For Lanchester, "culture" figures prominently. The gap between the industrial and finance sectors is a "cultural difference." The myriad screw-ups of the banking sector, "all the funny smells, the missed warning signals, the misaligned incentives, the distorted attitudes to risk, the arrogance of the masters of the universe, the complicity of regulators, the doziness of legislators—symptomized a culture, and also constituted one. It was the culture of the financial industry." Or consider this explanation for a property boom with scarcely a historical precedent: "Our risky, long-term, innovative (sometimes recklessly so) mortgages came into existence because the market set out to find ways to let us fulfill our heart's deepest desire, to own our own property. The appetite created the products, not the other way around."

In other words, it's the cupidity, stupid. Even Alan Greenspan, arguably the most substantial institutional player in the history of the present crisis, settles on greed as the answer. In 2008, after two decades as head of the Federal Reserve (where his insistence on low regulatory standards and lower interest rates helped inflate the credit bubble), he had a revelation on par with Saul on the road to Damascus. There was "a flaw in the model...that defines how the world works." That flaw was greed: the "self-interest of lending institutions" failed to protect shareholders, much less customers.

The evident irony is that greed—the self-interest of individuals, spread across the society—is exactly what's supposed to make capitalism work. This is a tenet of classic liberalism, raised to a fundamentalism by Ayn Rand and her protégé Greenspan. And while Lanchester rakes Greenspan over the coals for this contradiction, he can only do so halfheartedly. They basically agree on the cause of the current crisis. Greed done us in.

A further, more superficial flaw of the greed explanation regards its character as an unchanging truth of human disposition. How has it nonetheless managed to peak so recently? Lanchester offers at least one curious rejoinder: the United States won the cold war. Absent ideological combat with communism, "the good guys won, the beauty contest came to an end." Once "capitalism was unchallenged as the world's dominant political–economic system," it brooked no checks on its power; greed had a free hand, and everything went pear-shaped. He seems serious as he writes this. Never mind about the Great Depression, say, or the Panic of 1873, or the South Sea Bubble.

Peculiar as this history is, the basic elements are familiar: greed and regulation, hammer and tongs. This is the forever war on offer in 13 Bankers, by Simon Johnson and James Kwak. Chapter One opens in the heyday of the Federalist debates, with Thomas Jefferson and Alexander Hamilton arguing over the power of a central bank; two centuries later, the war between go-go bankers (Team Greed) and prudent government (Team Regulation) retains its furor.

Johnson and Kwak operate the econo-blog The Baseline Scenario; Johnson is better known as the former lead economist of the International Monetary Fund. But of late he is a celebrity apostate. His 2009 Atlantic article "The Quiet Coup" made the elegant point that if any other country were offered the assistance package with which the US government favored its corporate sector, it would have been squeezed into a structural adjustment program so austere it would have made the stones of Mt. Rushmore bleed. No such measures were forthcoming. From this, we deduce the current balance of power in the United States: as slanted toward its money oligarchs as the most corrupt backwater, having captured the Bretton Woods organizations to boot.

13 Bankers reprises the argument, but it is not enough for an entire book. The authors fill it out with the requisite glosses on the motley of finance schemes and regulatory regimes, albeit with less facility than Lanchester. More pointedly, they plop their kernel of analysis within the context of past struggles and wheel toward the future (the "next financial meltdown" of the subtitle). The current crisis has provided us an opportunity to do things differently: "History shows that finance can be made safe again. But it will be quite a fight."

And yet the history told in their book shows nothing of the sort. Quite the opposite. The book, perhaps unintentionally, thoroughly debunks the dream of regulation. Instead, it suggests that the fight is no fight at all but a fairly rigid bit of choreography. The authors detail at prolix length the "oscillation" between Team Greed and Team Regulation, each of which perpetually insists it has brought the systemic problems to heel, and each of which is inevitably embarrassed. Writing about the lotus-eaters of the '90s—"Sophisticated macroeconomic theories and wise policymakers, they suggested, had learned to tame the cycle of booms and busts that had plagued capitalism for centuries"—Johnson and Kwak promptly note how wrong they were. Again.

The authors seem, in that instant, on the verge of realizing that the problem is the dynamic itself—that the choice between greed and regulation is a false one, that the dance of bankers and regulators is exactly what ends in a tangle on the floor, with the markets a shambles, liquidity in drought and real unemployment trending toward 20 percent. But they are policy professionals, after all. They can think only certain thoughts. And so, as if in the grip of a nightmare or a repetition compulsion, they simply bid to be the very "wise policymakers" they have just pilloried. Surely this time, Team Regulation will get things sorted. Have Johnson and Kwak not bothered to read the book they've written?

Finally, neither of these standpoints—journalists and policy pros, however well intentioned—can grasp the extraordinary turn we have all taken or its historical specificity. At best, they are given ephemeral intuitions. Lanchester and Johnson and Kwak note that something world-changing happened in the 1970s, but none of them are quite able to put a finger on it. "Beginning in the 1970s and accelerating through the 1980s, the financial services industry broke free from the constraints of the Depression-era bargain," write Johnson and Kwak; no why is forthcoming. Meanwhile, Lanchester's mysterious wave at the cold war at least suggests the dimension of the disaster.

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