Extreme Money by Satyajit Das, FT Press, 2011, 459 pp
Extreme Money is a witches’ brew in which Satyajit Das describes the ingredients that went into manufacturing the global financial crisis. It is not a pretty picture, as Das paints how reckless risk-taking, financial engineering, leveraged buyouts, exotic derivatives, unsustainable debt and, most of all hubris, played their part.
Das is well qualified to write this book; having been an internationally respected expert in finance, his specialty is derivatives trading. His credibility was enhanced in 2006 when he warned about the coming financial meltdown in speeches and his book Traders, Guns & Money. Since then, he has written extensively for newspapers, having the knack of translating complex financial transactions into clear, simple prose.
In Extreme Money, Das looks back at the wreckage with a critical eye. No dry read, Das enlivens the book with popular culture references from Gilbert and Sullivan, the film Casablanca, the teenage series Twilight and words of wisdom from TV host Jon Stewart. There are also some telling vignettes in which Das describes his own journey into the heart of darkness of the financial world.
Like Dante’s tour of the Inferno, Das introduces his readers to the crazy world of high finance. What most horrified me was how, in the first half of the 2000s, all this craziness became the new norm. So while the masters of the universe had just about everyone conned into thinking hell was really heaven, for the traders making millions in bonuses, it was. But when the rest of us got burned when the economy came crashing down in 2007, it became a hard-learned lesson that we had been taken for an expensive ride.
I particularly enjoyed (if that’s the word) his account of how the economy became “financialized,” where “money makes money―never mind about making things.” This, to me, is the crux of how the economy got into so much trouble. It is worth quoting Das and little bit of detail, because this is really important.
Financial engineering replaced real engineering is the engine of growth. Debt-fuelled consumption drove growth, particularly in the developed world. Investors, such as central banks with large reserves, pension funds, and asset managers, eagerly purchased the debt. Borrowing fuelled higher asset prices, allowing greater levels of borrowing against the value of the asset. Spending that normally would have taken place over a period of years were squeezed into a short period because of the availability of cheap borrowing. Business over-invested in production capacity assuming exaggerate it goes would continue indefinitely.
What the masters of the universe created was nothing less than a perpetual motion machine, which eventually froze under the weight of impossible expectations rather than going on forever producing wealth.
Das’s coverage of the evolution of the financial system is good, and he deals with recent history. But he occasionally falters, and some errors creep into the book. For example, he dates the Big Bang expansion and deregulation of the UK financial system from 1989 rather than the correct date of 1986, but fails to see this as the beginning of a wider deregulatory movement that spread to other financial centers. In addition, he fails to appreciate the growth of the Eurodollar market in the creation of the borderless financial market.
Das also goes light in describing some of the theories that might explain the underlying causes. The best of these is Nicholas Taleb’s book The Black Swan, a sophisticated analysis of why conventional ideas of risk came unstuck.
Moreover, the book would have benefited from a deeper analysis of how the financial market became deregulated, which was a key precondition for its financialization. Das does provide an account of how the US chairman of the Fed, Alan Greenspan, championed deregulation, but he could have gone much further in describing the mania for deregulating not only US markets but elsewhere in the world.
In some ways, Extreme Money follows the writings of Frank Partnoy, whose detailed account of the growth of the derivatives market during the 1980s and ‘90s in his books F.I.A.S.C.O. and Infectious Greed. While updating Partnoy’s accounts, it is well worth reading these earlier books, which provide an excellent description of the financialization of the economy and in particular the role of derivatives.
The book was published by the Financial Times Press and is presumably aimed at their readers. This would explain inclusion of graphs and even some formulas in the book. While Das uses diagrams to explain the intricacies of exotic derivative products, they may well scare off some readers, which would be a pity, for much of what he has to say added to our understanding of the causes of the global financial crisis.