Fool’s Gold: Reflections on the Great Crunch
In What a Carve-Up!, his State of England novel set just before the recession of the early nineties, Jonathan Coe introduced us to the criminal aristocrats of the Winshaw family, whose avaricious interests exert disproportionate influence on economics, foreign policy, healthcare, agriculture and art. Coe’s voyeuristic banker, Thomas Winshaw, describes banking as ‘the most spiritual of all professions’:
He would quote his favourite statistic: one thousand billion dollars of trading took place on the world’s financial markets every day. Since every transaction involved a two-way deal, this meant that five hundred billion dollars would be changing hands. Did the interviewer know how much of that money derived from real, tangible trade in goods and services? A fraction: ten per cent, maybe less. The rest was all commissions, interest, fees, swaps, futures, options: it was no longer even paper money. It could scarcely be said to exist. In that case (countered the interviewer) surely the whole system was nothing but a castle built on sand. Perhaps, agreed Thomas, smiling: but what a glorious castle it was…
Twenty years on, we can consider that Winshaw’s sandcastle has been utterly pulverised by a tidal wave. No, that’s not right, because it implies that the market was destroyed from without. In Fool’s Gold, her masterful overview of the great crash, Gillian Tett acknowledges that we have seen fiscal disasters before – but always as a result of some global catastrophe: ‘a war, a widespread recession or any external economic shock.’ This disaster, Tett reminds us, ‘was self-inflicted.’ The terrorist attacks of September 11 2001 did not lead to global recession or enormous state bailouts. 9/11 could not damage the market anything like the market could damage itself.
It’s easy to ask ‘why didn’t we see it coming?’ but the truth is that barely anyone understands finance outside the finance industry, and, as Tett shows, many inside finance don’t understand finance either. Like mathematics, economics seems to be a discipline that can only be grasped in reference to itself; which is why all those newscaster metaphors just don’t work. The wealthy conservative won’t care about the intricacies of the system as long as all the lines go up, and the liberal-creative observer (Coe is an exception) considers economics essentially a tool of the ruling elite: beyond this, no investigation is necessary. Apart from a few lonely whistleblowers and serious journalists, everyone dropped the ball on this one.
Reading Fool’s Gold, I understood for the first time that the impenetrable language of banking is to some extent deliberate. ‘When bankers talk about derivatives,’ Tett explains, ‘they delight in swathing the concept in complex jargon. That complexity makes the world of derivatives opaque, which serves bankers’ interests just fine. Opacity reduces scrutiny and confers power on the few with the ability to pierce the veil.’ Tett doesn’t just pierce the veil but shreds it to bits in Fool’s Gold, which explains complex banking processes in terms that can be understood by the intelligent layperson – a necessary and overlooked task in economic commentary. The narrative is also livened up considerably by many of the principal players, who come off like Carl Hiaasen characters. At a drunken hotel conference in Boca Raton, JP’s head of global markets was pushed into a swimming pool when he tried to begin a speech; and another senior officer, Bill Winters, had his nose broken by a stray elbow. A good sport, Winters simply snapped his nose back into line and carried on partying.
Something that recurs again and again, deliberately or not, is the market as belief system rather than practical process. Mark Brickell, a banker on the JP Morgan swaps team, ‘took the free-market faith to the extreme… ‘I am a great believer in the self-healing power of markets,’ Brickell often said, with an intense, evangelical glint in his blue eyes.’ The executives of Tett’s book regard the market as not a tool or service created by humanity, but an all-powerful godhead on which mortal beings could exert not the slightest influence. Today the theme of post-recession commentary is one of hangdog contrition: the money-god is a jealous god, and our reckless credit card bingeing has brought down the wrath of his invisible hand.
The faith of the disciples was not rewarded and in September 2008 we had the infuriating and hilarious spectacle of Hayek and Friedman devotees begging for state handouts. Governments happily obliged with overwhelming bailout packages. The lame duck was not allowed to sink. The duck was dragged out of the water and blued into the nearest vetinerary hospital. Thirty years of doctrinaire free-market capitalism had gone smash, leaving us in a weird bridging limbo between the old world and the new. Tett quotes one confused financier: ‘Now it is clear we need a new paradigm. But we haven’t found it yet, and frankly I don’t know when we will.’
Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastophe, Gillian Tett, Little, Brown 2009