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Understanding Finance So You, and America, Won’t Get Screwed By Wall Street

Understanding Finance So You, and America, Won’t Get Screwed By Wall Street: Illustration by Justin Page

Illustration by Justin Page

In the wake of the 2008 economic crisis, writer John Lanchester set out to understand how the entire financial system collapsed. In his 2010 book I.O.U.: Why Everyone Owes Everyone and No One Can Pay, he explained the history and mechanisms that brought the world economy to its knees. His latest book, How to Speak Money, addresses the language used by financial professionals—an esoteric vocabulary that hampers real industry reform—and hopes to bridge the knowledge gap between Wall Street and Main Street. His belief, as he explains below, is that doing so can give Main Street a fighting chance to make our banking and financial policies more equitable for all.

PLAYBOY: You already wrote a book in the aftermath of the financial crisis—I.O.U.—what compelled you to write another? Was there still a large gap in public knowledge about what happened during the crash?

LANCHESTER: Very much a gap in knowledge, very much. When I finished I.O.U. I actually said that I’d never write another book about finance and economics because the credit crunch seemed like such a unique event and then I expected economics would sort of fade in importance in peoples’ lives, really. There was this crisis and it was very interesting and it had come and gone. And then I think essentially what’s happened is for lots of people it’s still 2008. Things haven’t moved on, and there’s a great sense of stuck-ness and felling squeezed by economic circumstances that started with the credit crunch and haven’t really changed. I kept being asked to explain things. People still have the sense that they don’t know what the hell is going on.

PLAYBOY: It feels like How to Speak Money is less an indictment of the system than your previous book. I.O.U. sometimes felt incredulous about the financial system. And How to Speak Money accepts the situation and tries to give readers the tools to understand the financial system.

LANCHESTER: It’s interesting that you say that. Maybe I have grown more sanguine. I wanted this book to not feel angry, but to be more like a toolkit. I wanted to explain the vocabulary and then to give people room to make up their own minds. I felt sometimes if your line is too firm and angry that you’re not taking readers with you. They get the gist early on and don’t follow with you, then they don’t get the tools to make up their own mind.

textwrap From-the-Mag November-2014 Forum Decoding-the-Moneymen

PLAYBOY: Is the finance industry being utilitarian with its choice of language or is it being opaque to obscure information from people intentionally?

LANCHESTER: From the point of view of the person who doesn’t know what the words mean, it doesn’t really matter. If RMBS-based CDOs come up in conversation, it actually doesn’t matter if somebody is using that language to bamboozle you or whether they’re just using it because it’s the utilitarian way of talking about collateralized debt obligations made out of residential mortgage-backed securities.

PLAYBOY: Yet there are financiers intentionally trying to screw people.

LANCHESTER: Oh, totally, yes. Let me be clear, I think some people in the financial industry are deliberately ripping people off all day, every day, every week. There’s an incredibly reckless idea where it actually doesn’t matter at all what something is worth as long as the price is going up and people are still buying.

PLAYBOY: Where is the most surprising gap in public knowledge of finance?

LANCHESTER: The single biggest tectonic shift is attitudes to debt. The fact that we can all just stick our hand out the window and grab as much debt as we want. That’s the single most consequential area of change and this is historically very unusual. A lot of that comes out of debt being rebranded as credit.

PLAYBOY: I remember when I was at the University of Washington and tuition was going up. The reaction of every politician and every administrator was to tell us, “Well, you’ll be able to get federal loans to cover the gap in your cost of attendance.” There was an attitude that disregarded the fact that loans ever had to be paid back.

LANCHESTER: Debt has been treated as the cure for inequality. You can’t have the thing you used to be able to have, except actually you can if you borrow. And this sort of lifestyle is just out of reach—that thing you want that’s just out of reach—but you can still see all around you. Politicians have no proposal to fix the gap, and the economy is completely flat, median income is flat, and your opportunities and prospects in general are pretty flat. But you can have the thing you want just by borrowing. In a strange way, there’s a very profound link between increased inequality and increased debt.

PLAYBOY: Do you feel like the neoliberal economic policies of Reagan and Thatcher that started in the late 1970s and 1980s was essentially fueled by debt? The inequality was rising but people weren’t feeling it because they just kept leveraging up, leveraging up, and then 2008 was the moment where it’s like all the chickens came home to roost?

LANCHESTER: I think that is exactly one of the ways in which it played out. But I think there’s also a link through deregulation. The neoliberal package led to a rise in inequality and it also led to a rise in deregulation in the financial industry, which leads to a wave of finding new ways to make money by lending money. And so there’s sort of two prongs to that particular offensive. One is that the rich get a lot richer quickly. And the other is the finance industry has the shackles taken off and looks at a whole new set of ways to lend everybody money.

PLAYBOY: Did the 2008 Financial Crisis undermine all of Reaganomics?

LANCHESTER: The credit crunch disproved the central tenets of neoliberal economics. But it was a strange thing. It was like the story of an idol being knocked off an altar and the earth rumbling and shaking and a giant sound and a terrible moment of drama and there’s this sort of embarrassed silence. Everyone coughed and shuffled their feet. And the government sort of looks a bit nervous and they look at each other and shrug and they just put the thing back on the altar and invite us to go back to worshipping it. And that’s essentially what happened with the central doctrine of neoliberal economics, which is that you can leave free markets to regulate themselves and markets can fix any problem markets create. But the market created this problem that the market could not fix. We had to fix it with unprecedented and emergency measures. And then it’s gone back to party like it’s 2006 in terms of how the markets function and in terms of how we’re supposed to mentally model the world. It is strange there has been such a gap in terms of offering other ways of doing and thinking things through.

PLAYBOY: We haven’t learned much.

LANCHESTER: I do think we all need, collectively, to start thinking about what’s next because the prospect of steadily widening inequality and to the fact that inequality is inherited, is if we’re not careful we’re going back to sort of reinventing a version of feudal economics, which is nobody’s version of a good idea except maybe a few crazy Bond villains somewhere.

PLAYBOY: Is there a way in which the system was not allowed to fail enough?

LANCHESTER: Yeah. But historically the judgment will probably be that government officials had no choice but to bailout the financial system. It’s a hell of a pill to swallow, especially for us taxpayers, but we probably did have to swallow it. The problem is that afterwards financial institutions should have been treated as if they had actually failed and the kind of reforms that would’ve ensued if they had collapsed should’ve been implemented. But they weren’t. That was their “I’ll stick the idol back on the altar and hope no one notices” moment.

PLAYBOY: I think it was Rahm Emanuel who said something like, “We can’t waste this crisis.”

LANCHESTER: Exactly. And it was, “A crisis is a terrible thing to waste,” which was pointed out at the time and yet that’s what happened. We wasted it. But let’s not forget you have the world’s most powerful industry and the world’s most effective lobby arguing for no change, so it wasn’t some Buddhist process of drifting along that made sure nothing happened. It was a very, very active campaign that got what it wanted.

PLAYBOY: Your father was a banker himself and a lot of the financial crisis stems from, as you said in I.O.U., banking having its post-modern moment and became disjointed from its original mission. My brother is a community banker, where his bank focuses on giving loans and taking deposits. All apologies to my brother, but should banking be that boring? Is there any way to put that toothpaste back in the tube to making banking boring—but ultimately very beneficial—again?

LANCHESTER: That is what banking should be. If you want to trade derivatives and make securities and whatever else, then fuck off and start a hedge fund. It’s okay if people want to do stuff, and in a good year they crash their Ferraris into a swimming pool and drink Dom Pérignon, and in their bad years they go broke. That’s fine as long as it doesn’t cost us anything. And in a strange way, I think the kind of hedge fund industry is a better model for all of that because they can get up to all their shenanigans and when they go broke, they go broke and it’s none of our business. But what that’s got to do with the kind of banking that takes our deposits and helps us to buy houses and start businesses and things like that is not at all clear. It’s not at all clear why these so-called universal banks should do both of those things and why the banks that are doing these casino-like activities should have the Feds standing behind them and guaranteeing them. So, yes, to answer your question, I do think it should be boring. And I suspect we will eventually get there. I don’t know if it’s going to be through a sort of death by a thousand cuts process with small regulations gradually accumulating, which is what the bankers would say is happening at the moment. It’s more likely, I think, to be via another meltdown and possibly also by a kind of technological disintermediation.

PLAYBOY: What do you mean?

LANCHESTER: You have this odd thing in economic theory that it’s not actually clear why we have banks at all, that if you have people with excess cash on the one hand, and you have people who need cash on the other hand, why do we have banks in the middle taking a cut of it every time and going broke once every business cycle and requiring to be bailed out? In kind of a pure version of economic theory, you only need borrowers and lenders, you don’t need the people in the middle. So it might be that there will be a kind of—not disruptive in some bullshit sense of the term—but a genuinely disruptive innovation that sort of reinvents community banking, just without the banks in the middle.

PLAYBOY: Could you explain the difference you see between bullshit and nonsense?

LANCHESTER: Well, bullshit is like when you’re at a book festival and you see someone across the room and he waves at you and he says, “I loved your last one!” That’s bullshit. Whereas someone once said to me, “I haven’t read any of your books but I’m absolutely certain I’ll love them if I do.” See, that’s nonsense because that can’t be true. So it’s a difference between kind of the flim-flam people use to try to sell things and keep the world’s economies moving and indeed keep social life and human interaction moving. “That haircut really suits you,” and that sort of thing, a lot of which is bullshit. And things that just can’t be true, things that are necessarily false because they’re intellectually incoherent. And the reason it’s an important distinction, I think, as I say in the book, things that are kind of… “We’ve invented a new way of making bonds entirely risk-free and yield more.” That’s nonsense, because that can’t be done. Whereas, “Come and buy my sexy, shiny bond,” that’s just bullshit.

PLAYBOY: Like all these subprime loans add up to a Triple-A security, that’s nonsense.

LANCHESTER: Yeah, that’s nonsense. It’s nonsense to think you can have people who have never owned property before, whose credit is so bad that they couldn’t even have a car loan five minutes ago, whose payment histories don’t exist because they didn’t have a payment before, and create securities that are more secure than any but the five biggest corporations in America. Only five corporations in North America have AAA debt. And the idea that we bundle a bunch of sub-prime mortgages and magically create securities that are more secure than that, that’s nonsense.

PLAYBOY: What are the practical effects of if people had more financial literacy?

LANCHESTER: I’m not sure. We would see a greatly increased attention to this thing about the correlation of inequality and inheritability. That’s a real biggy. In more unequal societies, inheritance basically determines the outcome of your life. That would become central to the political debate. And so the whole thing would be reframed differently. It would be reframed about who do we want to be, what do we want the rules to be for where you’re born in this country? America is the land of opportunity in terms of the history and conception of itself. Does it matter that it actually isn’t, just as a plain fact you can see in the statistics? It isn’t the land of opportunity. It’s the land of your daddy’s daddy determining what your life is. Does that matter? And if it does matter, how do we fix it? It’s likely to begin from that starting point and I don’t know the specifics of what the policies will be. Actually, funny enough, I think that the big, general framing is almost more important because once we’re having the right conversation, we start having the right answers.

PLAYBOY: It seems like the framing is turning a little—Occupy didn’t have what the Tea Party did which was true organization behind it, getting people elected, but it did seem to adjust how we started framing issues of inequality. Then Thomas Piketty’s Capital in the 21st Century has created an intellectual framework about inherent inequality in capitalism. Do you think that the conversation is changing?

LANCHESTER: I do, I really do. It’s starting to change and it’s the kind of change that takes a decade to really play out in terms of electoral politics. But there are straws in the wind. Young people are one of the most disruptive political forces in any society as is a really pissed off middle class. And that’s what’s being created at the moment. Occupy had a very effective way of asking one very pointed question that got sort of buried under lots of other stuff. You have all these moments when it seemed like Occupy was protesting about everything, which actually blurred that message about the 1% and the 99%.

PLAYBOY: What did you think about Piketty’s book?

LANCHESTER: It’s really, really interesting. Even if he’s wrong, he’s right, if you see what I mean. There are all these controversies about specific data points but his thesis, in essence, is true. The gap between the wealthy and the rest has been growing and kind of becoming more baked in. It’s a really important book and especially the historical analysis. A lot of the arguments about the data are a bit misconceived, really. Because historical economic data, they’re like potatoes in that you can’t use them raw, you have to cook them so they’ll go down. The data had to be cooked otherwise it’s not really usable. And the other thing, by the way, I don’t know many people who make all of their Excel files available freely online, which Piketty does.

PLAYBOY: Going back a little bit to when we were talking about the biggest gap in public knowledge, since you present a lot of terms that you want people to know, what are some terms people may bump into and not be familiar?

LANCHESTER: A year ago, I’d have instantly said LIBOR, which is a pretty boring, esoteric number that no one outside the financial industry had ever heard of. It turns out that actually your mortgage is linked to it because, whatever it is, $300 trillion of transactions are underpinned by this obscure rate set in London by a bunch of people who ring up in the morning and say what they want to pay for each other’s debt. So LIBOR is very important, very esoteric, and not where the story is this week. That’s one of the things that’s really interesting, the way that this week’s story keeps changing. So now, if I was publishing the book, if I was sending the book to press today, I’d probably stick something in about “dark pools.” I’d have something on high-frequency trading. But, again, the story keeps moving on because there is almost a new scandal every week. And the scandal of the week is often something that you hadn’t heard about a week before. So it’s difficult to tell you exactly the obscure term that’s impacting you the most right now.

PLAYBOY: In researching your books what was the most surprising or interesting “I never would’ve thought that” thing that you learned?

LANCHESTER: I quite like dead cat bounce, just because it’s pure evil.

PLAYBOY: Do tell.

LANCHESTER: A dead cat bounce is when the market falls and falls and falls, and then it kind of picks up for a moment, like when a cat hits the pavement and rebounds slightly after plummeting off a building. I remember an economist friend saying, “The UK economy is not recovering, it’s just a dead cat bounce, not a recovery.”

PLAYBOY: The acronyms can be so insidious, like one of your favorites, a “vanilla mezzanine RMBS synthetic CDO.”


PLAYBOY: They can just roll off the tongue without much thought behind the weight behind what you’re talking about.

LANCHESTER: Yeah, and there are ones that are sort of semi-comic. PIIGS was one that was used in the Euro crisis, and that was Portugal, Italy, Ireland, Greece, and Spain, P-I-I-G-S, which was bitterly resented in the relevant countries, of course. One I came across quite recently in a discussion was SWAG, which is silver, wine, art, and gold as an investment category. That’s a thing. There’s an index that tracks SWAG.

PLAYBOY: Now I want to find that index and follow it.

LANCHESTER: One of the odd things about wine is that, as an investment thing, it goes up and down even as the wine is maturing but it plateaus when it’s fully mature and then stays there for however long—two, three decades, whatever. And then as it gets older, it becomes completely undrinkable. It’s basically turned into vinegar, at which point, guess what happens to the price.

PLAYBOY: It goes down?

LANCHESTER: No, it goes up because by that point it’s so rare there’s almost none of it left in the world because people drank it up when it was mature so then it has rarity value and the price goes up again. So the weird thing—the fact that vintage wine becomes completely undrinkable has no effect on its investment value. That’s shit you couldn’t make up.

Jeremy Repanich is a Senior Editor at Playboy. Follow him on Twitter @racefortheprize.

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