Why Financial Crises Recur

Hint, it's not the people.

May 31, 2010

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179187_wolf_1Of course, the latest  market meltdown has served up a crop of books. Every financial crisis does so, be it the savings & loan crisis, the junk-bond meltdown, the LTCM blow-up, the rogue trader who brought down a centuries-old bank.

These are, necessarily, always post-facto, much like the court trials that wind on for years, prosecuting an Enron, a WorldCom, a Tyco. By the time a jury renders judgment the next loophole has already been exploited. Can we learn from history. That’s a doubtful prospect, suggests Satyajit Das, author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.

“Modern finance is generally incomprehensible to ordinary men and women. The level of comprehension of many bankers and regulators is not significantly higher. It was probably designed that way. Like the wolf in the fairy tale: ‘All the better to fleece you with.’

“In a thoroughly post-modern contradiction, this incomprehensibility creates a market for a literature that pretends to explain the inner workings of arcane finance. The average reader is not only happy to be stripped of his or her saving in every which way but is also willing to fork out further money to read how it was all done. The latest books on the global financial crisis inhabit this strange no man’s land between fiction and non-fiction writing.

“Like all things, the writing is formulaic. Central to these works is the idea of the “human touch”, entailing the humanisation of money. It involves characters that the readers can identify with or hate and an overly Manichean perspective of the world where preferably good triumphs over evil.”

It would be so much simpler to identify the “bad guys” in advance, rather than the systemic incentives that encourage bad securities underwriting (Henry Blodgett), off-book leverage to manage earnings (Enron) and naked bets on synthetic CDOs (a certain whiz at Goldman Sachs). But those don’t easily lend themselves to anthropomorphisms.

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