Book Reviews - Greed: all about it

Published on Wednesday 8 April 2009 15:53

THERE IS A WAY TO BENEFIT FROM the economic crisis: publish books about it. The first few dozen have already arrived and many more are on the way ... I can't wait for Sir Fred Goodwin's autobiography.

One of the first analyses out of the trap is by Martin Wolf, doyen of economic commentators at the Financial Times. Wolf has the knack of writing accessibly and brilliantly on highly complex financial and economic subjects – about which he knows a lot and is not just pontificating. This book began as a series of insightful lectures on international finance at Johns Hopkins University in 2006. The following year, the US sub-prime mortgage market imploded. This allowed Wolf to re-work his lectures into an overview of a global financial system in trouble. The book's racy subtitle is How to cure financial crises in the 21st century.

Unfortunately, for once the erudite Mr Wolf fails to deliver. True, the book is more analytical and detailed than many other "instant" books about the credit crunch. But its origin as a series of academic lectures means it is too disjoined, too repetitive, and too generalist in its conclusions to satisfy. It is more of an hors d'oeuvre than the full meal.

The core of Wolf's analysis is that the crisis had its origins in the huge imbalances in monetary flows between the consumerist West (particularly the US) and the export-orientated economies of the East (particularly China). The story goes back to 1997 when there was an earlier wobble in the global financial Meccano set. The rising Asian economies had been borrowing money from America and Europe hand over fist to invest in new manufacturing plant. But they borrowed more than they could pay back. The financial markets got jittery and pulled the plug. Result: currencies crashed, interest rates soared and billions went up in smoke.

After 1997, the Asian economies decided enough was enough. They would not borrow from the West any longer – they would lend instead. The Asian tiger economies started saving the profits from their burgeoning export industries and putting it into Western banks. These banks then lent the cash you and me used to buy ever more expensive houses and run up ever bigger credit card bills. This personal debt mountain made us feel richer, so we bought even more plasma screens and cheap shirts from the Asian tigers, thus perpetuating the economic merry-go-round. Upon this house of cards was built a new, international banking system which passed around the money in the form of increasingly complicated financial instruments that no-one quite understood.

Wolf is good at explaining all this. Even as someone who never bought into the hype about how boom and bust had been eliminated from the system, Wolf is still clearly mesmerised by how this giant debt machine just grew like Topsy before going bust.

His remedy is plausible: the Asian economies have to stop lending to the West and instead use their money to invest in building up their own economies and buying more stuff from America and Europe. We in the West need to start saving more and borrowing less.

As a prescription for economic health, that seems commonsensical. Unfortunately, Wolf does not go on to explain how we make these reforms. Indeed, Wolf's articles in the Financial Times in recent weeks have become ever more pessimistic. He thinks the politicians across the globe are refusing wilfully to understand just how deep the recession is going to be; and that they have to pump a bigger financial stimulus into the economy or we face a prolonged downturn. I expect it won't be long before he rewrites this book.

Another instant economic analysis of the crisis comes from Paul Mason, the economics editor of BBC 2's Newsnight. This is published by Verso, the unashamedly left-wing publishing house, which gives a big hint about Mason's animus. He writes in a suitably apocalyptic tone: "We have lived through an event most of us thought we would never see. Global capitalism, on the precipice of collapse, has been rescued by the state. The alternative was oblivion. The future is unclear…"

This purple prose rather puts me off. Besides, the fascinating thing about the current crisis is that there seems to be no great move to dump capitalism as such, merely to do running repairs. The Chinese aren't demanding their shopping malls be closed so they can don their old Mao boiler suits again. The view from the Kremlin is that the West has now inflicted two horrible disasters on Russia: first Marxism, and now the loss of their imported Mercedes. In America and the UK, no-one is demanding the end of wage labour and the election of Soviets.

Mason's book is more (tabloid) journalism plus a chronology of the crisis. His one interesting insight is his resurrection of the idea of so-called Kondratiev economic cycles. Nikolai Kondratiev was a Soviet economist who (before disappearing into Stalin's Gulag) proposed that capitalism operated on the basis of (approximately) 50-year-long investment cycles. The boom phase of each cycle is triggered by some new technology wave; eg steam power and the railways; steel and chemicals; motor cars and mass production techniques; electronics; and latterly the internet and mobile phone. But as industries mature, each boom phase is followed by a financial crisis and a "down wave" of recession lasting 15 to 25 years, until the next technology arrives. If true, you'd be advised to invest your savings in gold bullion and wait for 2035 and the arrival of nanotechnology.

On the other side of the ideological divide from Mason comes Eamonn Butler, head of the free market Adam Smith Institute. His book is subtitled: Who is causing the crisis and how to solve it. Butler focuses more on the economic downturn in the UK, which looks like it might prove uniquely deep and long-lasting. He pins the blame on New Labour.

In 1997, Gordon Brown promised prudence and an end to boom and bust. But by mid-2008, the average British household had run up debts of 59,715 – twice as much as in Europe. Unwinding those debts could take a long time. As Chancellor, Brown also went on a public borrowing spree that frightened the markets. As a result, the Bank of England had to start raising interest rates sharply in 2006. This move helped to trigger the mortgage defaults that scuppered Northern Rock the following year. The dominos had started to fall.

Like Mason's book, Butler's polemic is too simplistic and name-calling to be a satisfying read. Above all, Butler fails to engage with one of the most important questions thrown up by the crisis: what role did financial deregulation play in causing the meltdown? The word "regulation" has now been appropriated by politicians of every hue, anxious to blame (and punish) the bankers for the mess. As a result, no-one has a clue what regulation means any more, or what will be regulated.

Government regulation of banks can cover everything from banning holidaymakers taking money out of the country to fixing the maximum mortgage loan at three times salary. Too much regulation, or too little, will cause the system to break – but where is the happy median?

After the Great Depression, a new form of regulation separated banks into two distinct kinds – your normal high street deposit bank that looks after ordinary customers; and investment banks that dabble in share-dealing and market making. Investment banking is high risk. The experience of the 1930s was that blurring the line between the two sorts of banking meant that ordinary deposits ended up funding casino-like gambling in shares – and everyone lost.

The questionable deregulation of the past few decades was the decision to remove the legal "Chinese wall" between deposit and investment banks. That did for HBOS, for instance, which stupidly lent firms money and simultaneously owned shares in the same outfits. As a result, HBOS lent when it shouldn't have and lost money both ways when projects collapsed. Had investment banks and deposit banks stayed separate, we would still have had a crisis but HBOS might have been spared.

If you want to understand the unique role of investment banks in the present economic disaster, read William Cohan's new book. Cohan started out as an investigative journalist before becoming an investment banker on Wall Street (no-one ever became a millionaire writing for newspapers). As a result of this dual experience, his blow-by-blow account of the fall of Bear Stearns, the US investment bank whose collapse last year precipitated the credit crunch, is the first proper historical insight into what is happening. You can read it as a thriller, a history, or an expos and still enjoy it whichever way. I'm sure they will make an HBO movie out of it someday.

How long will we have to wait for the definitive books on the credit crunch? It could take a while. The Wall Street Crash was in 1929, but it was 1955 before John Kenneth Galbraith's wonderful (and funny) history of the event, The Great Crash, appeared. And it was 1963 before Milton Friedman and Anna Schwarz wrote the most respected technical explanation of the Great Depression. I predict that there will be no shortage of books in the interim.