Book Reviews - Review 239

Most of us have little understanding of precisely what caused the 2008 credit crunch, beyond that it had a lot to do with greed and something called toxic loans. John Lanchester was in a similar position when he stumbled upon the subject of high finance during research for a novel; so fascinating did he find the matter that he decided to devote a non-fiction book to it instead.

In many ways, he does an excellent job. Not being an economist, he has no interest in defending financial malpractice on the one hand, or in presenting economics as an unavoidably esoteric art, on the other. He describes the ins and outs of derivatives, credit default swaps and collateralised debt obligations (though I confess I can't now remember all the detail). The story, in its essence, is simple; banks wanted more and more money, and found more and more complex ways of getting round the rules to make sure they made it. Governments were complicit in the banks' schemes, either because of their members' own ties to the banking industry, or because they made great political capital out of spuriously booming economies.

Lanchester muses at length on the motivations of the bankers and politicians, emphasising the self-delusion that was integral to the financial system's veering off into the twilight zone. At the heart of the matter is that, in inventing highly complex derivatives, bankers claimed to have found the holy grail of, not just finance, but all human endeavour: maximum gain for zero risk. Bankers and other lenders found that, by taking on risky debtors and selling on the debts to third parties, they could forego boring concerns about whether their debtors could cough up. Presumably, everyone counted on not holding the bad debt when the whole thing blew up.

As Lanchester would have it, most bankers were so intoxicated with success that they never imagined it would blow up at all. I wonder about this. There are bright people at the top of the financial tree - not very nice people, perhaps, but bright. Lanchester takes Alan Greenspan's professed astonishment at the failure of the banking community at face value: Greenspan was arrogant and self-deluding, he argues, but not insincere. I don't know, but I have my doubts. You don't get to be the head of the most powerful financial institution in the world without being having your head screwed on - and not without having the kinds of friends, in both politics and finance, who can trust you to do what they want. Lanchester has a general faith in people's intentions, if not in their judgment, which I sometimes found naive. For all his articulate outrage, he doesn't seem to suspect the presence of genuinely dark forces behind the crisis, at any stage.

A more important weakness of the book is its concentration on abstract financial machinations, at the expense of the other side of economics: raw materials and naturally imposed limits to growth. Clearly, the banking crisis was inevitable, given the almost unimaginable scales of the debts that have been accumulated (and Lanchester is at his best in his graphic illustrations, often very witty, of the magnitude of the mess we're in). Even if we had ten times as much oil as we do, a huge correction was due. But the fact is that we are just at the point of starting to run out of some of our most precious sources of energy, notably oil and natural gas - starting to run out, in the sense of reaching the upper limit of production, and therefore a naturally-imposed limit to economic expansion. So if ever the crash was going to happen, it was going to happen when the general prospects for the economy were looking shaky enough to scare investors and reign in their lending.

In the light of these resource constraints, of which far and away the nearest and most concerning is Peak Oil, all proposed solutions to the economic crisis are a waste of print. No amount of reform is going to remove the inevitability of economic decline - indeed, I wonder if knowledge of the inevitability of this looming decline informed the lenders', and the American politicians', recklessness when it came to making money while there was still money to be made. And correlated with the inevitability of economic decline is the ultimate inefficacy of governments' emergency nationalisation of banks. Lanchester describes the latter phenomenon as a "bold, decisive and ultimately successful action top prevent the crash from turning into a global depression". Give it time, John. The fact is that the debts are still there in all their mountainous horror, but owned by the public. If the economy doesn't start growing again, ruin awaits. And the economy - the real economy - will never grow again, not for a sustained period, because this will push the price of oil back up and restart the cycle of economic contraction.

Without considering Peak Oil, you can only half make sense of the financial crisis. Lanchester paints a grim picture, but the actual picture is worse: that there is precisely zero chance of a sustained economic recovery - ever.

I believe Lanchester makes one or two other, more specific errors. Some have been pointed out by reviewers in the press. One that I spotted was his attibution of Canada's weathering of the economic storm better than the other major economies to its old-fashioned financial prudence. But the fact is that Canada didn't need to fund an artificial boom: unlike the USA, Britain, Germany and Japan, Canada is awash with natural resources. It's a naturally rich country.

My review of the book perhaps seems a little harsh; after all, most of its basic arguments are cogent and correct. And it deserves praise for being a fantastically readable account of some pretty arcane topics. In fact its defining features are its energy and its wit. It's always risky for a non-expert to venture into highly technical exposition - but when that non-expert writes as well as Lancester, one can forgive him the occasional slip-up.