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Crash course

Recent books help make sense of the 2008 collapse. But the global financial system continues to run amok.

By Larry Krotz

The Great Depression of the 1930s spawned an enduring literature (think John Steinbeck, Sinclair Lewis, Barry Broadfoot) that shaped not only what we thought about the Depression, but what we thought about our society and ourselves for decades after. Eighty years later, the economic collapse of 2008 is beginning to do the same. But while the literature from the dirty ’30s was about deprivation and struggle, the offerings about the recent recession have more to do with our bafflement with a global economic system so complex that ordinary mortals are at pains to understand what is happening to both them and their money.

Something went horribly wrong in the financial world in 2008. For Roger Yount, a British banker in John Lanchester’s 2012 novel Capital, the first indication of trouble is when his expected annual bonus of £1 million ends up £970,000 short. For Harry Salter in Mount Pleasant by Canadian author Don Gillmor, it’s when the anticipated $1 million bequest from his recently deceased investment-broker father comes in at $13,000.

Initially, our characters feel inoculated against both surprise and hardship. As Roger Yount sees it, the collapse of Britain’s Northern Rock bank had nothing to do with him: “Their credit had dried up, the Bank of England had been asleep, and the punters had panicked.” In his tony Toronto neighbourhood, Harry Salter coasts along, part of a comfortable generation that “didn’t carry the deep fiduciary scars that the Depression generation did. . . . Savers of string, collectors of rainwater. . . . They lived the lives they could afford, measured daily in pennies. But not Harry’s generation. Money was a vague ideational pool they all splashed in. If Harry bought the $14 Shiraz rather than the still very modest $24 Bordeaux, what would it save him? A few hundred a month. A spit in the ocean.”

In both Capital and Mount Pleasant, criminal activities hastened the collapse of formerly staid investment cultures. This plot ploy, while convenient, is also a bit too pat. In the real world, the subprime mortgages and risky derivatives that brought obscene wealth to a few before sinking the entire system were so badly regulated that their purveyors, for the most part, could claim they had done nothing illegal. As the Occupy movement reminded us, nobody went to jail. The effects of the crash, however, were profound and lasting. In the end, it was not just Roger Yount losing his annual bonus (and then his job) or Harry Salter losing his inheritance; it was trillions of dollars in savings and millions of jobs worldwide up in smoke.

We continue to witness the effects of the crash, mostly in the diminished prospects for our young. But what has become clear is that the iffy banking practices that brought about the 2008 recession were not some aberrations promptly corrected. In The Future: Six Drivers of Global Change, a new non-fiction book by former American vice-president Al Gore, we learn that the bankers, having rebounded more quickly than virtually anybody else, are now producing more questionable financial products than ever. Astonishingly, Gore advises us that “exotic, computer-driven ‘manufactured financial products’ like the ones that led to the Great Recession now represent capital flows with a notional value twenty-three times larger than the entire global GDP.”

We came to this moment without much warning. In the years leading up to the 2008 crash, as I watched my shares in Nortel Networks fritter to nothing, I recall thinking, “This can’t happen. They make real objects.” Well, they did make real objects (telephones), but that wasn’t sufficient. And though there are still companies that make things, this is less and less where the money is. Huge profits are reaped in ways almost incomprehensible to the traditional investor. The experts themselves are dismayed. Gore quotes John Cartlidge, a University of Bristol researcher specializing in automated trading, who says we live in a world “dominated by a global financial market of which we have virtually no sound theoretical understanding.”

The role of humans has been shunted to the periphery. Rather than me musing for days whether to keep or sell my Nortel stock, the trades referred to by Gore are made by supercomputers programmed with algorithms that kick in automatically in response to mathematical triggers. One essential element is speed: vast numbers of trades are executed in little more than a millionth of a second.

Some quirky things happen. One morning in May 2010, for example, the value of the New York Stock Exchange dropped a thousand points and then rebounded, all within 16 minutes. The puzzling event was blamed on complex interactions between automated trading algorithms that created, in Gore’s words, “an algorithmic echo chamber.” Ideas were floated to make sure such a “flash crash” would not happen again, one being a requirement to hold buy-or-sell offers open for one full second. But, Gore reports, “the captains of finance . . . reacted with horror to this proposal, claiming that the one-second requirement would bring the global economy to its knees.”

The 2008 crisis boiled down to a sudden and widespread shortage in available capital triggered by junk mortgages linked to bewilderingly complex financial transactions carried out by computers. Gore describes these trades as “difficult to distinguish from gambling.” Lanchester and Gillmor paint the global financial system as little better than a Ponzi scheme. Whether it is actually so may not be the point. In an environment where large portions of the investment market have come to be seen as untrustworthy or, at the very least, function outside our comprehension, we will believe the worst. Our literature is starting to reflect a world where fortunes are made from little that is tangible; where algorithms have outstripped ethics; where a minority are extremely rich while the rest stagnate; where the young have no choice but to join Occupy movements.

Larry Krotz is a writer in Toronto.

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