This audio book, available on the Nashville library’s site, taught me that I had very little knowledge about our complex financial system. Unfortunately, it also failed my litmus test for being a great informative book when the author spent the final twenty percent editorializing.
I marvel from time to time about how the vast majority of the money in the world isn’t “real,” in the sense that there isn’t enough physical currency to represent it all. This book opened my eyes to exactly how absurd and scary the Western financial system can be. After spending a good amount of time explaining terms and describing complex financial instruments, the author turns his attention toward analyzing the current financial crisis which came to a head in 2008. Prior to reading, I was fairly familiar with stocks and bonds, the consumer-facing side of the markets. What I didn’t know were the kind of debt-soaked tools and misdirection investment banks had created in the name of making profits.
If I could sum up what I learned from the first half of the book, it would be this: much of the “wealth” in our current system is based on nothing but debt. I’m still a free-market capitalist through and through, but it seems a stretch to think that much of what investment banks do provides true value to our economy. Their essential function seems to be to encourage individuals, businesses, and even governments to go into debt, and then make casino-like bets on whether they can repay, calculating risk in order to reap profits. One bank will bet a consumer will pay back his mortgage, another will essentially make a counter-bet by purchasing insurance against a default while selling the debt to a third party. It really is all smoke and mirrors based on my limited understanding of it. Banks want to leverage themselves as much as possible, having financial obligations on the books, but wagering that they won’t have to pay them. This, to me, is the epitome of foolishness and irresponsibility, regardless of the prevailing economic system.
With regards to the crash of 2008 and the subsequent “credit crunch,” the author does to a good job of explaining how the perfect storm came to be. By his estimation, the problem actually stemmed back to the fall of Soviet communism over twenty years ago. With such a large counter-force gone, free-market capitalism flourished in the developed world and enjoyed ever-loosened government restriction. With economic growth, it became easier for individuals to borrow money, including home mortgages. Because demand for housing increased, property prices skyrocketed, especially in the author’s native Great Britain. Everyone wanted to get into the game. This led to banks making riskier loans at sub-prime (read: higher-than-market-rate) interest rates. It was no bother to the banks, however. They were able to insure against consumer default, package risky debts, and sell them in financial markets. Investors, of course, did not realize the true risk of what they had purchased, focusing only on the tantalizing profit potential.
This is a crude overview, of course, but those were the core issues. As home prices peaked and then fell, unemployment rose, and mortgages went into default. The house of cards began to collapse. This is where the author’s personal viewpoints begin to creep into the writing. He spends quite a while talking about “laissez-faire” capitalism as promoted by Alan Greenspan. While it is a valid technical term, his usage of it sometimes comes across as sarcastic and condescending. His solution seems to always be more government regulation, even while acknowledging that part of the problem was lack of enforcement of existing regulations. While I do think it absurd that a bank must only retain enough liquid capital to cover eight percent of its obligations, it also seems apparent that the government is the worst manager in any arena it enters. Further, the author portrays the consumers of sub-prime mortgages purely as victims. To be sure, some were targeted with predatory lending practices, but at the end of the day, is it not my personal responsibility if I over-leverage myself, taking out a loan I will likely not be able to repay? Personal responsibility, both at the consumer and bank level, would have gone a long way toward preventing such a collapse. The author doesn’t seem to entertain this idea, instead insisting on more control by national governments which, by all accounts, can’t balance their own budgets.
The final section of the book came across as a bit of a diatribe against laissez-faire capitalism in general, which is where I began to lose interest. I can understand why the author feels the way he does based on his worldview, but I was reading primarily for knowledge, not opinion. He is certainly a smart man who did a good job of explaining complex topics, though I wish he could have left it at that. I don’t know the answers to such complicated problems as were presented short of self-restraint and common sense, but we all know those can’t be legislated.
Overall, I’m glad to have read the book and garnered a better understanding of exactly what lies in the bowels of financial markets. In some ways it was enlightening, in other ways it was a bit scary, but it is almost always better to have knowledge than to be blissfully unaware. I would recommend this book to anyone wanting a better understanding of the forces behind the 2008 financial meltdown or the world of finance in general.