- The Washington Times - Tuesday, January 19, 2010

ANALYSIS/OPINION:

I.O.U.: WHY EVERYONE OWES EVERYONE AND NO ONE CAN PAY

By John Lanchester Simon & Schuster, $25 260 pages

Reviewed by Claude R. Marx

The Great Recession has been extensively dissected by scholars, journalists and so-called business experts. While many of their analyses have been insightful, they are all too often filled with jargon and not particularly enjoyable to read.

Enter award-winning British novelist John Lanchester. In “I.O.U.: Why Everyone Owes Everyone and No One Can Pay,” he has given readers an engaging and occasionally entertaining look at the culture of debt. He focuses on the big economic picture and doesn’t include many human interest anecdotes. No tales of woe such as “Jane Smith tried every way possible to avoid foreclosure, but the bank she used got a big bailout.”

Fortunately, his engaging writing style makes big numbers and complex concepts approachable.

The financial collapse of Iceland, which was symptomatic of some of the worldwide economic woes, is summarized with this rather pointed observation: “Yes, many consumers were personally irresponsible; but then, they were encouraged to be. The banks treated financial irresponsibility as a valuable commodity, almost as a natural resource, to be lovingly groomed and cultivated.”

It’s nice to see an author criticize all sides. This is a welcome contrast to many liberals, whose sole focus was on the so-called big bad financial institutions, and to conservatives, who blamed it on the government trying to force lenders to make risky loans.

Mr. Lanchester aims most of his criticism at the bankers who engaged in many of the risky investment practices and some of the so-called academic geniuses who devised them. The approach he takes is that of a bemused critic with a sense of humor - a cross between Mark Twain and CNBC’s Maria Bartiromo.

This book is a not terribly taxing way to learn about credit default swaps, derivatives and other financial tools, which investor Warren Buffett once called “financial weapons of mass destruction.”

Mr. Lanchester explains, for example, why financial institutions consider deposits to be liabilities on their balance sheets. Banks classify deposits that way because liabilities belong to someone else. He uses this revelation as not only a teachable moment but also an opportunity to take another shot at banks. He notes that banks too often “act as if it’s their money and they are doing us a favor by letting it sit in their bank earning interest.”

Mr. Lanchester leans to the left politically and occasionally allows the narrative to become a populist screed. It’s an unusual position for a banker’s son and it has no doubt prompted some to deem him a traitor to his class.

His chapter on the effect of the financial crisis on the lower- and middle-middle class is revelatory and insightful without being maudlin. He visits certain areas of Baltimore to see how people whose homes have been foreclosed are surviving and chronicles how many of them fell victim to scams when trying to strike a deal with their lenders.

Unfortunately, when making his points he sometimes overreaches and decreases the effectiveness of his argument. “From 2005 onward, across the industry, most of the lending was reckless and some of it was actively criminal,” he writes.

That’s a questionable premise. To be sure, there were many bad loans, and the housing bubble wreaked havoc on the economy. But even at the depth of the recession, most homeowners were current on their mortgage payments.

While there were certainly widespread difficulties with the housing market, in 2008 - the height of the recession - one in 54 households received a foreclosure notice. That is an above-average rate but still means that most mortgages were sound. The majority of home loans were probably made in good faith and borrowers had trouble because of factors beyond their control, such as losing a job.

Mr. Lanchester is especially critical of regulators in the United States and Britain for looking the other way at the excesses of the capitalist system. He accuses them of behaving “like drivers who regard speed limits as things to be obeyed only by muppets.” And he compares the regulators to lifeguards who supervise swimmers while “secretly pouring blood in the water because they think it would be more exciting if the place were livened up by a few sharks.”

This amusing, yet pointed, writing style makes “I.O.U.” an engaging look at an important, and often dry, subject.

Claude R. Marx is an award-winning journalist who has written extensively on politics and financial services.

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