I.O.U.: Why Everyone Owes Everyone and No One Can Pay

From Publishers Weekly Starred Review. With clarity and a conversational style often (sometimes deliberately) lacking in the financial industry and its coverage, British journalist Lanchester (The Debt to Pleasure) takes readers on a comprehensive global tour of 2008's economic meltdown, focusing on each guilty parties' contributions to-and missed opportunities to halt-the worldwide crisis. Starting with the political buildup and then marching through the field of "banksters," regulators, mortgage companies and everyone else in a position to know better, Lanchester illustrates exactly how loans from predatory and incompetent players wound up being sold as triple-A investments, and how a subsequent housing market dip toppled the financial system. By prioritizing the financial sector and tenets of laissez-faire capitalism (to the point that it "became a kind of secular religion"), those in charge of the markets failed to identify the growing systemic dangers; meanwhile, those responsible to the public acted as if benefits for financial institutions also benefited every economic participant, no matter how small. Laypeople seeking to understand the crisis, and what it means for their own bank account, will find Lanchester's volume an oasis of understanding in a sea of partisan spin and convoluted financial language. " I.O.U. is the map to the crazed world of contemporary finance we have all been waiting for. John Lanchester's superb book is everything its subject, the 2008 crash, was not: namely lucid, beautifully contrived, comprehensible to the reader with no specialist knowledge—and most of all devastatingly funny. I urge you to read it." —Will Self, author of Liver "Warning to bankers everywhere in the world. You better buy every single copy of I.O.U. because Lanchester's painted the target on you that the rest of us so desperately wanted to see. My prediction: bankers may be an endangered species once I.O.U. gets out, and from this read, I can tell you, while I hate to rush Darwin, it can't happen fast enough." —James J. Cramer, host of CNBC's Mad Money and author of Jim Cramer's Getting Back to Even “ I.O.U. is so clear and funny and cleverly written. I love the personal asides and observations and jokes and bits of autobiography that make it seem human and not text-book like. And the more and more improbable analogies for the ups and downs of the markets (a bride's nightie...a gorilla on a pogo stick). But what I like most is that it makesxa0mexa0feel intelligent, because I can now understand all this stuff.” —Marina Lewycka, author of A Short History of Tractors in Ukrainian “In I.O.U. , the only truly entertaining book I've read on the subject, the British writer John Lanchester theorizes that after the Cold War, capitalism could go wild because Western governments no longer had to worry about competing with communism. This is a fascinating idea...” —Jacob Weisberg, Newsweek “The novelist John Lanchester's short book on the finance crisis, I.O.U. ...is literary and profound...But this is not just finance-for-poets. Lanchester...is a master explainer with an excellent grasp of sophisticated finance. His book is a gem.” —Christopher Caldwell, The Daily Beast“Witty, lucid, solicitous of the average person's difficulty in grasping the conceptual underpinnings of international finance...Lanchester manages to know enough to explain the terrain clearly and yet he never loses his perspective...Lanchester had me in the palm of his hand...” —Salon.com“[A] writer with literary bona fides...[Lanchester] has the intellectual heft and the chops, as a jazz musician might say, to deliver a resounding book about the crisis...An elegant and wonderfully witty writer, Mr. Lanchester approaches his subject with a newcomer's verve. It's infectious...frame[s] the Great Recession in startlingly original terms.” —Devin Leonard, The New York Times , Sunday Business“[H]ere's a prediction: Few if any of these [finance] books will be as pleasurable—and by that I mean as literate or as wickedly funny—as John Lanchester's I.O.U ...Mr. Lanchester explains these things methodically, with mathematical rigor, but he is also, crucially, guided as much by perception and feel...history lesson is peppered with dead-on references to everything, including “Annie Hall,” “The Simpsons,” “The Wire,” Hemingway and Jacques Derrida...Before you begin to cry, pick up a copy of I.O.U. Good humor and good company will be the things that'll get us through.” —Dwight Garner, The New York Times “[John Lanchester has] leaped into nonfiction, combining prodigious research and reporting with his storytelling gift. The result is this elegantly crafted little book-equal parts history, economic primer, and social commentary-that manages to be, by turns, acidic, frightening, and sharply funny. What it is not is boring. In fact, this is a better book about the global meltdown than any other to date-and some of our best financial and business writers have weighed in on the subject...He explains everything so lucidly, so simply, refracted through the lens of history for perspective, that it all makes perfect sense. A” —Tina Jordan, Entertainment Weekly “[Lanchester] brings his mischievous wit to bear on the Great Credit Crackup in his boisterous primer...His method: to boil complex instruments and linkages down to anecdotes, outlandish images and acerbic asides that strip away those layers of bank jargon. The result is the perfect read for anyone still wondering what went wrong and why.” — Bloomberg News John Lanchester is the author of the novels The Debt to Pleasure, Mr. Phillips, and Fragrant Harbor ; and a memoir, Family Romance . He is a contributing editor at the London Review of Books and his work has appeared in The New York Times , The New Yorker , The Observer , and The Daily Telegraph , among others. Among several other prizes, including the Whitbread and Hawthornden Awards, Lanchester was awarded the 2008 E.M. Forster Award by the American Academy of Arts and Letters. He lives in London. From The Washington Post From The Washington Post's Book World/washingtonpost.com Reviewed by Dennis Drabelle [email protected] British journalist and novelist John Lanchester's gift is to see the big picture in new ways. Much of our current plight, he argues, comes from lack of competition in the broadest possible sense. The end of the Cold War left the United States, in his view, with no countervailing ideological force to worry about. "One of the most vivid consequences was the abolition of the ban on torture, which had previously been a defining characteristic of the democratic world's self-definition." But with no conflicting worldview to which the United States needed to feel superior, a big reason not to torture was swept off the board. "The same goes for the way in which the financial sector was allowed to run out of control," Lanchester adds. With capitalism "unchallenged as the world's dominant political-economic system . . . it could have been predicted that the financial sector . . . was in a position to reward itself with a disproportionate piece of the economic pie. There was no global antagonist to point at and jeer at the rise in the number and size of the fat cats; there was no embarrassment about allowing the rich to get so much richer so very quickly." As for the bust-bailout syndrome that has afflicted the United States and other economies, Lanchester sums it up in a phrase that could almost be a poetic couplet: "a huge, unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialized." Copyright 2010, The Washington Post. All Rights Reserved. Excerpt. © Reprinted by permission. All rights reserved. INTRODUCTION Annie Hall is a film with many great moments, and for me the best of them is the movie’s single scene with Annie’s younger brother, Duane Hall, played by Christopher Walken, the first of his long, brilliant career of cinema weirdos. Visiting the Hall family home, Alvy Singer—that’s Woody Allen—bumps into Duane, who immediately shares a fantasy: “Sometimes when I’m driving … on the road at night … I see two headlights coming toward me. Fast. I have this sudden impulse to turn the wheel quickly, head-on into the oncoming car. I can anticipate the explosion. The sound of shattering glass. The … flames rising out of the flowing gasoline.” It’s Alvy’s reply which makes the scene: “Right. Well, I have to—I have to go now, Duane, because I, I’m due back on the planet Earth.” I’ve never shared Duane Hall’s wish to turn across the road into the oncoming headlights. I have to admit, though, that I have sometimes had a not-too-distant thought. It’s a thought which never hits me in town, or in traffic, or when there’s anyone else in the car, but when I’m on my own in the country, zooming down an empty road, with the radio on, and everything is moving free and clear, as it hardly ever is with today’s traffic, but when it is, I sometimes have a fleeting thought, one I’ve never acted on and hope I never will. The thought is this: what would happen if I chose this moment to put the car into reverse? When you ask car buffs that, the first thing they do is to give you a funny look. Then they give you another funny look. Then they explain that what would happen is that the car’s engine would basically explode: bits of it would burst through other bits, rods would fly through the air, the carburetor would burst into fragments, there would be incredible noise and smell and smoke, and you would swerve off the road and crash with the certainty of serious injury and the high probability of death. These explanations are sufficiently convincing that I find that the thought of putting the car into reverse flits across my mind only very temporarily, for about half a second at a time, say once every two or three years. I’m sure it’s something I’ll never do. For the first years of the new millennium, the whole planet was zooming along, doing the equivalent of seventy on a clear road on a sunny day. Between 2000 and 2006, public discourse in the Western world was dominated by the election of George W. Bush, the attacks of 9/11, the “global war on terror” and the wars in Afghanistan and Iraq. But while all that was happening, something momentous was taking place, not quite unnoticed but with bizarrely little notice: the world’s wealth was almost doubling. In 2000, the total GDP of Earth—the sum total of all the economic activity on the planet—was $36 trillion. * By the end of 2006, it was $70 trillion. In the developed world, so much attention was given to the bust in dot-com shares in 2000—“the greatest destruction of capital in the history of the world,” as it was called at the time—that no one noticed the way the Western economies bounced back. The stock market was relatively stagnant, for reasons I’ll go into later, but other sectors of the economy were booming. So was the rest of the planet. An editorial in The Economist in 1999 pointed out that the price of oil was now down to $10 a barrel, and issued a solemn warning: it might not stay there: there were reasons for thinking the price of oil might go to $5 a barrel. Ha! By July 2008 the price of oil had risen to $147.70 a barrel, and as a result the oil-producing countries were awash with cash. From the Arab world to Russia to Venezuela, the treasury departments of all oil-producing countries resembled the scene in The Simpsons in which Monty Burns and his assistant, Smithers, pick up wads of cash and throw them at each other while shouting “Money fight!” The demand for oil was so avid because large sections of the developing world, especially India and China, were undergoing unprecedented levels of economic growth. Both countries suddenly had a hugely expanding, highly consuming new middle class. China’s GDP was averaging growth of 10.8 percent a year, India’s 8.9 percent. In fifteen years, India’s middle class, using a broad definition of the term meaning the section of the population who had escaped from poverty, grew from 147 million to 264 million; China’s went from 174 million to 806 million, arguably the greatest economic achievement anywhere on Earth, ever. Chinese personal income grew by 6.6 percent a year from 1978 to 2004, four times as fast as the world average. Thirty million Chinese children are taking piano lessons. Two-fifths of all Indian secondary school boys have regular after-school tuition. When you have two and a quarter billion people living in countries whose economies are booming in that way, you are living on a planet with a whole new economic outlook. Hundreds of millions of people are measurably richer and have new expectations to match. So oil is up, manufacturing is up, the price of commodities—the stuff which goes to make stuff—is up, the economy of (almost) the entire planet is booming. Who knows, optimists think, with the global economy growing at this rate, we can perhaps begin to think seriously about meeting the United Nations’ Millennium Development goals, such as halving the number of hungry people, and of people whose income is less than $1 a day, by 2015. 1 That seemed utopian at the time the goals were set, but with the world $34 trillion richer, it suddenly looked as if this unprecedented target might be achieved. And then it was as if the global economy went out one day and decided it was zooming along so well, there’d never be a better moment to try that thing of putting the car into reverse. The result … well, out of what seemed to most people a clear blue sky, the clearest blue sky ever, there was a colossal wreck. That left an awful lot of people wondering one simple thing: what happened? I’ve been following the economic crisis for more than two years now. I began working on the subject as part of the background to a novel, and soon realized that I had stumbled across the most interesting story I’ve ever found. While I was beginning to work on it, the British bank Northern Rock blew up, and it became clear that, as I wrote at the time, “If our laws are not extended to control the new kinds of super-powerful, super-complex, and potentially super-risky investment vehicles, they will one day cause a financial disaster of global-systemic proportions.” I also wrote, apropos the obvious bubble in property prices, that “you would be forgiven for thinking that some sort of crash is imminent.” I was both right and too late, because all the groundwork for the crisis had already been done—though the sluggishness of the world’s governments, in not preparing for the great unraveling of autumn 2008, was then and still is stupefying. But this is the first reason why I wrote this book: because what’s happened is extraordinarily interesting. It is an absolutely amazing story, full of human interest and drama, one whose byways of mathematics, economics, and psychology are both central to the story of the last decades and mysteriously unknown to the general public. We have heard a lot about “the two cultures” of science and the arts—we heard a particularly large amount about it in 2009, because it was the fiftieth anniversary of the speech during which C. P. Snow first used the phrase. But I’m not sure the idea of a huge gap between science and the arts is as true as it was half a century ago—it’s certainly true, for instance, that a general reader who wants to pick up an education in the fundamentals of science will find it easier than ever before. It seems to me that there is a much bigger gap between the world of finance and that of the general public and that there is a need to narrow that gap, if the financial industry is not to be a kind of priesthood, administering to its own mysteries and feared and resented by the rest of us. Many bright, literate people have no idea about all sorts of economic basics, of a type that financial insiders take as elementary facts of how the world works. I am an outsider to finance and economics, and my hope is that I can talk across that gulf. My need to understand is the same as yours, whoever you are. That’s one of the strangest ironies of this story: after decades in which the ideology of the Western world was personally and economically individualistic, we’ve suddenly been hit by a crisis which shows in the starkest terms that whether we like it or not—and there are large parts of it that you would have to be crazy to like—we’re all in this together. The aftermath of the crisis is going to dominate the economics and politics of our societies for at least a decade to come and perhaps longer. It’s important that we try to understand it and begin to think about what’s next. * GDP, which will be mentioned quite a few times in this story, sounds complicated but isn’t: it’s nothing more than the value of all the goods and services produced in an economy. GDP per capita, measuring each individual’s piece of the country’s pie, is the standard measure of prosperity. © 2010 John Lanchester Read more