I.O.U.: Why Everyone Owes Everyone And No One Can Pay (2010) - Plot & Excerpts
According to conventional wisdom an educated person will understand literature, art, languages and maybe even science. Understanding finance is not necessary. This according to Lanchester is curious, particularly as finance and economics are the very things that have have a huge impact on our lives and if more us had even a cursory understanding of these subjects the world would certainly be a more democratic place. The industry has become so powerful that its values dominates thinking and culture. Although, ironically, part of this understanding is realising that the architects of our current system don't understand large parts of it themselves. A system has been created that has derivatives, hedge funds, credit default swaps and off-shore companies which is impossible to unpick. The function of banks to hold deposits and lend to businesses and individuals is a very important one that was established in the Renaissance by the likes of the Medici but in today's world we are very far removed from those basic functions.Up until 2008 the economy seemed to be doing well in many parts of the world. So its modern guiding principles, the risk models such as the Black-Scholes equation, remained unquestioned. These risk models however make fundamental assumptions about human rationality. Yet there are major disagreements about the nature of rationality between the two major shools in economics: Keynesians and Monetarists.To begin to understand it all Lanchester goes back to the basics and looks at company balance sheets and in particular the balance sheet of RBS. At one point it it had assets of £1.9 trillion and to put that in context the GDP of the UK was £1.7 trillion. The equity (the difference between the assets and liabilities) was relatively small yet still a massive number. Lanchester compares it to Apple which in 2008 had $39.5 billion in assets, $18.5 billion in liabilities and $21 billion in equity compared to RBS's £1,900 billion in assets, £1,809 billion in liabilities and £91 billion equity. So Apple looks more balanced and safer. Yet surely banks should be safer than companies selling gadgets!Using their huge scale banks have been have suddenly been able to change the rules in their favour. Lanchester quotes Simon Johnson a professor at MIT (formally chief economist of the IMF) on banks' influence over Congress that they have achieved almost everything that they have lobbied for including the free movement of capital across borders and a repeal of the regulation separating commercial and investment banking. Even the ratings agency are essentially controlled by the bank. They were formally a subscriptions service but the SEC (US securities and exchange commission) changed that and by accident created a massive conflict of interest now banks are the rating agencies customers and their scope has expanded to include mortgage backed securities. City values now dominate culture. Money is like a religion and the richest in society are closest to God. Statements like “If you are so smart then why don't you have more money” are commonly held beliefs and those with money often feel superior to their peers.Reading this book gives one a useable knowledge of what the financial crisis is all about and make a strong case for a more general understanding of the financial industry. It is become such a dominant force that it is imperative that we all know how it operates because man is both its creator and its servant. Lanchester sets out to explain in layman's terms the 2008 collapse of the real estate bubble and the subsequent credit crunch that nearly brought the global economy to its knees. He does a nice job of outlining not only the technical side of the problem (collateralized subprime mortgages, faulty risk assessment) but also the socio-political culture that gave the problem room to grow and worsen (strict laissez-faire capitalism, lack of political will to enforce existing financial regulations or create new ones).There's a nice narrative pace here. His language can sometimes become a little too irreverent or jaunty to support the rather serious charges of malfeasance he levels, but overall his argument remains very credible. Lanchester offers no real silver lining, but the diagnosis is really very interesting.
What do You think about I.O.U.: Why Everyone Owes Everyone And No One Can Pay (2010)?
This is the best book I have read in a very long time.
—starshine56789
Clearly set out, including the author's politics.
—RoseShill
Very good dummies guide to the financial crisis
—Pometic
Too much vitriol and too few facts. Meh.
—NadineRioku
