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The Hindsight Primer
on 27 December 2012
IOU is a breezy overview of the financial crisis. It's great for anyone with no financial background and who somehow was unable to see a tv news report or read a magazine since 2007. With hindsight, it pulls together all the elements of the blowup, as if it were obvious, foreseeable, and inevitable. That is the benefit of hindsight, and Lanchester weaves it together as a coherent story that fits my description, with drama, with impact and with colour.
He explains beautifully how banking is bogus, from the very basic perversion of balance sheets on through to new formulas for new products that don't work, even in theory. The most damning revelation is statistical - that the masters of the universe actually believed their own theories that such a blowup was not statistically possible, for a period of time longer than the universe has been in existence.
I was very concerned that there was no mention of the ratings agencies - but he came through, a little weakly, and very late, after page 208 (of 232), but hardly gave them the tonguelashing he gave others and which they richly deserve. They blessed these bogus products, for the money they received, and took down the entire world economy for their 40 pieces of silver. You must not minimize the role of the ratings agencies. They've gotten away with it utterly and completely.
One point missed was Alan Greenspan's overlooking of bank balance sheets. Of all people, the detail-obsessed Greenspan should have noticed that banks' balance sheets were ballooning outside of all proportion to their actual state of affairs. Dangerously, disastrously. That was after all, his very business. No one has ever called him on that one.
There is also an overriding theme that I got from IOU that the author didn't. That is debt. It seems that all efforts in investment banking, mortgage banking - banking in general - is to put customers in debt. The more they can put people in debt, the richer the bankers become - and of course, that's all that matters. So ways were found to make subprime loans, and then bundle them to make them more creditworthy than quality loans. The Thatcher government was all about getting people out of rentals into private homes they could not afford the way she ran the country. In the USA, no-docs loans, liar loans and the rest were all ways to get people into debt. If you read David Graeber's book Debt, you will see how powerfully crippling this is. It's not a zero sum game; you don't get rich by the amount you put someone else in debt. Leverage makes it far worse than that. And IOU dances all around that fact without ever recognizing it.
So while IOU is an easy, breezy overview, it really is just an good overview of a very deep flaw.