Sunday, March 06, 2011


To those of you trying to better understand the recent global financial crisis (GFC), I highly recommend you read this book:

And watch this film:

Whoops: Why Everyone Owes Everyone and Why Nobody Can Pay
is a non-fiction book written by a British novelist about the events leading up to the global financial crisis in 2008. It provides an excellent introduction to obstruse banking terms, such as collaterised debt obligations (CDOs) and credit default swaps (CDSs), and, just in case you are particularly financially ignorant (as I am), a beginner's guide to balance sheets, equity, leverage and securitisation as well. Written by a novelist, as opposed to an economist, the book is firmly rooted in a recognisable human reality, where intellectual arrogance, free market economics and lots, and lots of money, combined to create a heady mix that led some people to conlcude what we were witnessing was 'the end of boom and bust'.

However, where Whoops! emphasises the Pythonesque absurdity of it all, the principal register of Inside Job is one of bitterness and betrayal. Perhaps it is significant that Whoops! was written by a British novelist, whereas Inside Job was made by a group of American filmmakers.

The main purpose of the film seems to be to expose some of the lies (or, pieces of recieved wisdom) that have grown up around the global financial crisis. And, to my mind, it has three big whoopers in its sights.

The first: no one saw the crash coming and the ensuing crisis was unforeseeable.

The film tells us that the FBI were briefing about systemic fraud and improper accounting in the financial services industry as early as 2004; and, in 2005, (then) Chief Economist at the International Monetary Fund (IMF), Raghuram Rajan, published a paper - 'Has Financial Development Made the World Riskier' - in which he surmised that financial deregulation and incentive structures (read: bonuses) had substantially increased the likelyhood of a "full-blown financial crisis" or a "catastrophic meltdown." Still, nothing was done.

The second:

The people responsible for the crash - senior banking executives, government regulators, credit ratings agencies and economic researchers - were not aware of the risks or the broader implications that their actions would have.

According to the film, these people were not only aware of the risks but complicit in esculating said risks because it was in their own self interest. Basically, bankers and traders were allowed to play fast and loose with other people's money and excessive risk taking was rewarded.

And the third:

It was a systemic failure, part of the culture and so we do not know exactly who was respondible.

Inside Job points the finger directly at several individuals, many of whom now occupy senior positions within the Obama White House, implicating them because public policy is not something that happens by accident.

All interesting stuff and well worth checking out for yourself.

Now, what are we going to do to try and avoid the same thing happening again?


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