Writing Worth Reading
Writing Worth Reading
Which brings us almost up to the present day, and your last book, All The Devils Are Here by Bethany McLean and Joe Nocera, about the crash of 2008. Is the title ironic?
It comes from The Tempest: “Hell is empty / And all the devils are here”.
There are lots of really good books about the recent financial crisis, by Andrew Ross Sorkin, Roger Lowenstein, William D Cohan and others. I’ve picked McLean and Nocera because they give a broad view, rather as Galbraith did for 1929. They tie everything together, from the central banks at the top of the chain down to the subprime borrowers at the bottom who were given credit because everybody else wanted them to have it. Their account will upset anybody who thinks you can reduce what happened to a single institutional failure or a single actor. It’s very hard on Fannie Mae and Freddie Mac. But it’s equally hard on Wall Street, and it’s pretty hard on [Alan] Greenspan, and on the Fed’s refusal to recognise or do anything about the developing credit bubble.
As you said at the beginning, once a bust comes, we get angry about the boom. But surely the human character also has caution baked into it. Why doesn’t the near-certainty of eventual loss deter us sooner – individually or collectively?
There’s a clue in the structure of MacKay’s book. It includes three big financial episodes. But it also takes in some non-financial phenomena, including alchemy and the Crusades, which MacKay views as analogous examples of human irrationality. If MacKay is right, then financial speculation is just one type of a broader human tendency to get caught up in things. People love a party, they love a crowd, they love to get enthusiastic and hopeful about the future. When you’re caught up in a crowd of people speculating, it’s a very exciting business.
What’s more, when you do get into loss, you will do anything to get out of that loss. As Daniel Kahneman and Amos Tversky have shown, losers stop being risk averse and start being loss averse. You double up on your bets. Clearly, there are deep-rooted psychological instincts, not only to enjoy speculation, but to carry on speculating even – or especially – when things are going wrong. We all have a bit of the rogue trader in us.
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John Gapper is chief business commentator of the Financial Times, where he writes a weekly column. He co-authored All That Glitters, an account of the collapse of Barings bank in 1995. His new e-book is How To Be A Rogue Trader, pegged to the story of a young trader who allegedly ran up $2.3bn of losses
