Books of the Year: Fantasies that turn into nightmares

This year's most thought-provoking book on the slump was Gillian Tett's Fool's Gold: How unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe. (See p27 for Tett's own selection).

by Robert Skidelsky
Last Updated: 31 Aug 2010

The work of a financial journalist and trained anthropologist, it's simultaneously a triumph of investigative journalism, the anatomy of a financial elite, and a gothic horror story in the style of Mary Shelley's novel, Frankenstein.

In brief, a group of whizzkids at JP Morgan invent a complex set of derivative products they believe will take the risk out of lending money: the fool's gold of the title. When these are used to finance sub-prime mortgage loans, the dream turns into a nightmare. 'What kind of a monster has been created here?' asked one. 'It's like you raised a cute kid who grew up and committed a horrible crime.'

Tett's book raises more questions than it answers. Was Blythe Masters of JP Morgan right to complain that the banks had 'perverted her derivatives dream'? Clearly not. The dream was inherently hubristic: money, invented to to cope with uncertainty, cannot be controlled by maths. By the same token, finance is too important to be left unregulated. Behind the fantasies of the whizzkids were those professors of finance, mainly from the University of Chicago, who claimed that financial markets were perfectly efficient, and government intervention otiose. The Frankenstein created by financial innovation awaits its Karl Marx.

Follies of Power: America's unipolar fantasy, by David Calleo, an American professor of European studies, deals with another kind of fantasy: the belief, crudely, that the US can and should run the world. Not only does it lack the capacity to do so, Calleo argues, but any such attempt would be morally repugnant. He offers a fascinating geopolitical perspective on the current economic crisis.

Calleo correctly points out that the US's world position depends on its ability to finance its external deficit. This ability, he argues, is in rapid decline. The high-productivity phase of US growth ended with the collapse of the boom in 2001. Since then, the twin deficits (internal and external) have ballooned as the US economy has become increasingly rickety. High domestic consumption has relied on growing consumer debt; new wealth to offset it came not from new investment but from speculation in equity and real estate; an 'unprecedented income gap (opened up) between the very rich and the rest', says Calleo. European and Chinese reasons for supporting the dollar have eroded, and with them the US's ability to support its hegemonic pretensions. So the crisis will not be ended just by 'fixing' the banking system; 'global imbalances' must also be fixed.

Roger Bootle, a City economist and financial analyst, would agree. He notes tartly that 'most academic economists, while clinging to the idea that their subject is relevant and of interest to the wider world, in fact practise a modern form of medieval scholasticism - of no use or interest to man or beast'.

His book, The Trouble with Markets: Saving capitalism from itself, offers a short, reliable analysis of the Great Contraction, in language that the intelligent general reader can understand. It is not full of arresting insights like Tett's, but Bootle has skilfully assembled all the elements of the crisis: its causes in financial deregulation and global imbalances, the pros and cons of a monetary versus fiscal stimulus, and how to design a system that avoids such disasters. It concludes that the hand of government will inevitably lie heavier on economic life. Markets must be made safe for the world if the world is to be made safe for markets.

Finally, the book I most enjoyed: Michael Holroyd's A Strange Eventful History: The dramatic lives of Ellen Terry, Henry Irving and their remarkable families. He has long brought to biography the mingled skills of a master-painter, conductor and military commander - all formidably displayed in this group biography of Victorian/early-20th-century theatre. His ability to keep in play a huge cast of characters and harmonise their discordance, as well as his undiminished linguistic subtlety and comic invention, are unsurpassed.

- Robert Skidelsky's Keynes: The Return of the Master (Allen Lane), was published in September

Fool's Gold - Gillian Tett, Little, Brown, £18.99
Follies of Power - David P Calleo, Cambridge University Press £25.00
The Trouble with Markets - Roger Bootle, Nicholas Brealey, £18.00
A Strange Eventful History - Michael Holroyd, Vintage £10.99

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