One of my favourite subjects in high school was economics because I was curious about how banking, high finance and political budgets work within Canada. (One of the favourite books explained government spending using guns and butter.) I took a course in my first year of university as well that was larger in scope by looking at political economic systems in Russia, China and the United Kingdom. While the details bogged me down, greatly affecting my grades, the macro-economic picture was much less illusory. These courses helped me understand the economic forces in the world and I applied that knowledge to a better understanding of “the big picture.”
But when the so-called “financial crisis” of 2008 occurred, I struggled to understand how the mechanics of the financial system were breaking down, literally on a weekly basis. Suddenly everything I learned in school didn’t fit the current economic malaise. It was a blend of investment bank failure, the collapsing automotive industry and the housing market in complete turmoil mostly in the United States with trillions of dollars at stake. So reading the stories and hearing about which bank failed, what government bailout was going to help which company and how the burst of the housing bubble was leaving people homeless, it left me numb. I didn’t know what to think or who to believe; I was simply struggling to understand what it meant to the world economic system and therefore what it meant to me. Something had changed systematically and my fundamental knowledge of economics wasn’t enough.
For British author John Lanchester it ran much deeper. His insightful new book was destined to be a fiction based on historical events, but as he did his research into the whys and how’s of the financial breakdown, he came to realize that “truth is stranger than fiction” and it was time for him to seek out the reasons why some banks were “too big to fail” and why the banks were no longer operating as simple lending institutions. Lanchester extends his study to include a comparison of financial operations and regulations in the United States, Canada, Germany, Iceland and the UK.
I also liked Lanchester’s personal stories. He starts the book with a tale about his father who was a banker for the Hong Kong Bank of Savings and Credit. Lanchester remembers a significant moment when his dad took money out of an automated bank machine. To Lanchester, it was a frightening experience: “What if the machine got its sums wrong and took all our money? What if the machine took someone else’s money by mistake and my father went to prison?” Clearly, this early childhood trauma left an impression on Lanchester in ways that shaped his feelings for banking and how money works. His chapter on housing called, “Boom and Bust,” is particularly revealing in this regard. But it allowed him to step back and look at the culture of housing and home ownership in Europe and the United States and point out the significant differences between the two.
What drives Lanchester though is his desire to fight Goliath (aka the Banks) with words. His book is full of astute observations and concise explanations that reveal a pragmatic sense of the larger picture, but his prose is often tinged with anger. This is best seen in an entire chapter called “Rocket Science,” where he describes how the banks were able to make billions of dollars without any risk. It’s a remarkable read and would stand alone as an essay fundamentally necessary for anyone to understand why the banks and the culture of risk put the world on the brink of economic collapse. For Lanchester, the culture of banking changed over the years as he came to understand that bankers, like all good capitalists, are interested in making a profit for their shareholders. Derivatives took that basic notion to the extreme in ways that no longer affected a bank’s constituency but the entire world. Remember, it was government action, aka public funding in Britain and the United States, that bailed them out. Lanchester goes to great lengths to explain why credit default swaps and collaterized debt obligations were man-made economic derivatives that never existed in traditional banking history.
John Lanchester’s book is an important start to understanding the big picture and how it affects us. He succeeds in telling us how and why the banks, government and financiers failed all at the same time and he’s done it in fewer than 300 pages. It would be a fine addition to the curriculum of a high school economics course.
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