All too often books on economics justify Carlyle's pejorative characterization of the subject as the dismal science. They indulge in dry statistics and arcane formulas. They talk down to their readers, often asserting that much of the subjects they are discussing are so complicated that only the experts are able to understand them; indeed, one has to wonder if even these so-called experts actually do understand them. They prefer the jargon of the insider to a language more accessible to a larger audience. It is almost as if these writers are purposely obfuscating, as if they are not interested in being understood by the general reader.
Bloomberg News London bureau chief Mark Gilbert's Complicit, a study of the what went wrong with the world credit markets and led to the recession in which we find ourselves currently embroiled, tries to avoid these pitfalls. While there are times he cannot quite manage to escape the snares entirely — and there is after all some excuse for the precision of professional jargon — his prose is usually aimed at the general reader and it usually hits its mark. He is willing to explain the arcane. He is unwilling to rely on the too complicated cop-out.
There may be a lot of references to M-LEC's, SIV's and CDO's. There may be discussions of hedge funds and risks and rewards of borrowing short and lending long. There may be fingers pointing at the esoteric machinations of institutions like the central banks and the securities raters. There may be the reliance on some of the economic clichés that have become part of the vocabulary of nearly everyone paying any attention to today's news coverage: moral hazard, liquidity crunches, and market bubbles. This is to be expected. These are after all the flesh and bones of the problem under discussion, and Gilbert does his level best to make all these things intelligible to the layman, without gross oversimplification.
The essential take away from his book would seem to be that there were many to be blamed for taking part in and allowing the risky speculation that became the norm for financial institutions world wide who were supposedly conservative custodians of their client's funds and their stockholder's best interests. This risky gambling with other people's money was not only tolerated, it was encouraged and rewarded. Paper profits earned huge bonuses and Cadillac perks for speculation. Conservative investing earned stones and ashes.
So long as market conditions remained propitious — easy credit, optimistic outlook, minimal regulation — the bubble grew and grew, larger and larger. The assumption was that what had risen would continue to rise. Until, an ill wind blew down what was a house of cards. Supposedly rock solid financial institutions found themselves embroiled in obligations they could not meet with funds on reserve, and unable any longer to find available credit. Trust in financial institutions gave way to panic. One company is allowed to go bankrupt. Mergers are arranged for others. Tax payers all over the world are saddled with the toxic assets of corporate behemoths deemed too big to fail. The results are catastrophic, and they have yet to be fully realized.
Article comments
1 - JamesB
Jack - good review of what sounds like a good book but I am disquieted by the seeming lack of any macro-economic policy context to the disasters that unfolded in the credit markets. The real blame for the crisis lies with the easy money policies of the central banks really since the 1980s. Every time growth stalled the monetary authorities lowered rates to stimulate credit expansion. This created the monstrously large financial sector we have today and the risky behaviour can be also be traced back to the same policies (think of the "Greenspan put" and the artificially low rates of return available on risk-free assets). Blaming the banks for an economy stuffed to bursting with dodgy credit is like seeing a foie gras goose being stuffed with corn and blaming the funnel.