The money shot3 min read . Updated: 09 Dec 2011, 09:09 PM IST
The money shot
The money shot
Extreme Money | Satyajit Das
Extreme Money is about much more than the financial crisis. Consider some of the things it contains. It has references to Gilbert and Sullivan operas, Oscar Wilde, the financialization of industry, travels of a 16th century Portuguese apothecary in Malacca, a quote from Spanish poet Federico Garcia Lorca, Jonathan Swift’s Gulliver’s Travels, Virginia Woolf, things Argentine author Jorge Luis Borges said, an Australian rock band called the Divinyls, Indian mythology and French postmodern semioticians, to mention just a few of the surprises in store for the reader.
At one level, Das gives us the conventional narrative of the crisis. He writes about the financial innovations: the derivative products, securitization, the building of a towering mountain of debt. He provides telling examples that drive home the absurdities of the time. To take one instance, Das refers to the egregious “pick and pay" mortgages, where borrowers picked the amount of loan and what they wanted to pay every month, for the first two years of the loan.
At another level, he elaborates on the economic theory that provided the intellectual sustenance for the financial revolution. The retreat from Keynesianism, the rise of the Chicago School, Reaganomics, the capital asset pricing model, the efficient markets hypothesis and the so-called Great Moderation are all covered. Das draws some delightful parallels, such as that between Harry Markowitz’s dictum that diversification reduces risk with Antonio’s speech in Shakespeare’s The Merchant of Venice, “My ventures are not in one bottom trusted, nor to one place; nor is my whole estate upon the fortune of this present year; therefore, my merchandise makes me not sad."
But at a more fundamental level, this book is about the corruption in values caused by what Das terms Extreme Money, by which he means not only the dangerous speculative games played with money, but also the attitudes and culture that have emerged out of casino capitalism. At the deepest level, this book is about hubris and the nemesis that inevitably follows.
It wasn’t just a question of flawed models, although they undoubtedly contributed to the divorce of finance and economics from reality. When a technical session at a “Global Financial Conference" is titled “Combining gamma diffusion methods and eigenvectors within and without Black-Scholes Merton frameworks for modelling mean reverting energy prices in an emerging market context—a non-technical overview", it’s difficult not to indulge in a spot of Schadenfreude when the modellers bite the dust.
Das compares the math professors who created these models to “piano players in the whorehouse". The financial media, cheerleaders for the markets, also get their share of invective, TV presenters being “the studs and starlets of financial pornography". But Das realizes that ultimately, it’s a question of politics. He says “the new finance provided the moral and intellectual basis for financial conquest, plunder and pillage". He writes that the “financial revolution" elevated economic theory to the status of a religion and that “Camouflaged as a ‘science’ in dense jargon and mathematics, the system was actually political ideology."
Das doesn’t think much of the measures the developed economy governments have taken to paper over the cracks—he calls them “Botox Economics". What does Das advocate instead? He writes, “The world has to reduce debt, shrink the financial part of the economy and change the destructive incentive structures in finance...Governments have to balance their books better...Banking must become a mechanism for matching savers and borrowers, financing real things…The world must live within its means."
That’s not going to be easy. As the quote from Dostoevsky’s The Possessed at the beginning of the book says: “It is hard to change gods."