Whoops: Why Everyone Owes Everyone and No One Can Pay

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Anyone who cares to know about the current financial situation; how we got there and who was responsible for it should read this enlightening and entertaining account by Lanchester. In his book, Lanchester brings to light what triggered the 2008 financial crisis. He lets people know what really went wrong in this compelling and understandable story.

The author takes us back in history and discusses the 1989 communism collapse that brought about financial markets liberalization and the abolishment of regulation in the United States. The author explains various financial concepts in a comprehensible language that can be understood by even the lay readers.

He clearly discusses the introduction and domination of the markets by collateralized debt obligations and credit default swaps. In the book, the author claims that “the process of lending is no longer driven by the legitimate desire of poor-but-reliable people to own a house, but instead a manufactured process driven by capital which is set loose looking for people to sign up loans.

An epidemic began of what has come to be known as ‘predatory lending’: mortgage lenders doing everything they can to sign up borrowers at higher-than ordinary, sub-prime interest rates, so that the debt they created could then be pooled and securitized and sold on as tranches of various grades of CDO”¹.

After reading this book, the reader will get to understand several things. Firstly, the reader will get a clear and comprehensible explanation of financial instruments and derivatives. The reader will also get to know the history of how the financial crisis started in the United States and UK and the devastating effects it has had on the economy. The author also explains how and why humans are not able to evaluate risk.

He also discusses why risk analysis programs and models lead us into taking even more risk and consequently, lead us into making the wrong decisions. The author gives a clear account on how and why things went wrong and were unable to be detected by people responsible for that. The reader will also get an understanding of the history of financial deregulation in the United States and United Kingdom and the failure to regulate financial markets².

In this book, the author tries to make sense of the 2008 financial crisis. He starts by describing an event where a student from Iceland cannot withdraw money for her rent because the country has run out of money. The author starts by making observations and later tries to dig out the truth. He blames the CDOs and CDS, the foolishness of the customers and poor regulation as the cause of the crisis, but lays the greatest blame on the bankers who underestimated risk by relying on incomprehensible and erroneous mathematical models.

Lanchester blames the bankers’ greed and incompetence for the crisis. He describes the devastating effects the financial crisis had on the low income citizens who had applied for the sub-prime mortgages. He also explains the accumulation of huge debts by banks leading to bankruptcy and collapsing of some of them. The author concludes by explaining that the world does not have the ability of containing another crisis and therefore appropriate steps should be taken to avoid it³.

The author wonders how banks could have been blind to the risks posed by these derivatives. Bankers are supposed to be risk-assessment experts and it beats logic that they got themselves into investments without assessing the risks. These banks gave out mortgages to sub-prime owners without caring whether they provided any security in terms of income or assets. Moreover, the credit rating agencies did not expose these high risk investments that banks were getting into.

The author clearly gives details on how the incompetence and irrationality of banking experts put the society in a difficult situation. He also illustrates the negligence of the political system in dealing with this issue. Changes have not been made on the financial regulatory framework to prevent the reoccurrence of another crisis. The innocent citizens are the ones suffering the most from the effects of this crisis⁴.

Lanchester lays the blame on several events and people. He explains how each guilty party contributed to the crisis and outlines all the opportunities that were ignored that could have helped prevent the financial meltdown. He notes that “the current crunch was based on a climate (the post-Cold War victory party of the free-market capitalism), a problem (the sub-prime mortgages), a mistake (the mathematical models of risk) and a failure of the regulators.⁵”

The author tells the story with a brilliant clarity. Each chapter is explained clearly. The chapter that tackles the offering of sub-prime mortgages to low income citizens is particularly enlightening. The author explains the plan by bankers to give low income citizens an opportunity to own homes by giving them sub-prime mortgages without requiring any security like assets or income. The real estate business started thriving because of an increased value in housing facilities.

The increasing value of housing gave the banks the assurance that even if the low income citizens were not able to pay their debts, they would repossess the houses, whose value would have increased greatly. However, the plan flopped when the value of the housing facilities started going down.

The homeowners were unable to pay the debts and the banks had to reduce the value of these facilities. Many banks were left with huge debts while others collapsed. The sub-prime home owners who had bought the mortgages ended up losing their savings and homes⁶.

This book exposes the horrifying truth about what really conspired to land us in the current financial mess. Those who want to know what really happened will find all the answers in this book.

The author patiently, clearly and skillfully guides the readers through the incredible details about the derivatives, regulators and sub-prime mortgages that led to the 2008 financial crisis. Everyone therefore needs to read this book so that we can all understand the ins and outs of modern banking. This will enable us to make informed decisions about our financial matters.

Lanchester takes us through each step of the unfolding financial crisis and exposes the immaturity and incompetence of the bankers and policy makers in believing in complex models and investing blindly in risky CDOs and CDS. This truth is disturbing as the bankers have a lot of influence over our finances and we trust them to make the right and informed decisions. The author brings to light how the world of finance is mysterious to us and yet it really affects our lives.

He therefore takes us on a tour of this world and exposes the baffling practices and laws involved. It seems the bankers have no idea about how financial products like CDOs and CDS operate, and this puts the civilians in a precarious situation. The author describes the whole crisis as “a huge unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialized.”⁷

In the story, the author applies psychological research findings that show that all human beings, even the most intelligent ones, tend to be inclined to erring in relation to risk. People believed that a free market corrects itself and referred to work based on historical data and therefore ended up underestimating risk.

The bankers relied on defective models evaluated by incompetent lawyers to buy and sell ineffective financial products. Lack of financial regulation has severe repercussions. However, everyone seemed to be in favor of deregulation of the financial markets. Regulating bodies such as the SEC of the United States and FSA of the UK were slacked in carrying out their duties⁸.

Anyone who has been trying to fully comprehend what happened to our economy will definitely find this book invaluable. The author understands that it is not just the economists who are interested in finding out what happened, but even the laypeople. Many books have been written about the 2008 financial crisis, but this particular one stands out because the author does not use terms that are incomprehensible to the layman.

He gives every reader a chance to know how the financial crisis started. The author has done a good job in helping amateurs in economics to know the cause of the crisis. He helps even more by illustrating his points using ordinary examples. Any reader will find this book enjoyable as the complex financial concepts have all been simplified and clarified. This book will leave the lay readers feeling more intelligent as they will be able to understand the complex world of finances.

The last chapter of the book is very helpful as Lanchester proposes the way forward. He suggests what can be done to remedy the crisis and ways through which we can avoid a similar occurrence. The author advises people to try and make a distinction between investment and deposit banks so that if the people responsible for the crisis decide to come up with their deceptive schemes again, they will go down alone without affecting the rest of us.

In the conclusion, Lanchester reveals that the projected United States deficit is bigger than any other in history and it will take a really long time before this debt is fully paid off. He is not sure whether the appropriate measures will be taken to deal with this crisis and prevent the reoccurrence of the same in future. There have been no laws implemented to prevent the occurrence of another financial crisis⁹.

This book is recommended to everyone because it is skillfully written to help even those who have no prior knowledge about finances to understand the 2008 financial crisis. The book is also recommended to students taking financial related courses, and especially those who want to pursue careers in banking.

The book can be understood by everyone. Actually, the author is not a banker and he tries to show that even the ordinary citizens who have no training in financial markets can be able to spot something that the bankers overlook. The book discloses a gripping account of the crisis in a humorous and understandable way.

The financial experts may regard this book as too basic, and may prefer to read about the financial crisis from other books written in more complex terms. But this book will be helpful to the layman who is yet to understand what really happened during the 2008 financial crisis. The laypeople will be able to go through an account that is free from economic jargon to get to the bottom of what really happened, and the implication that the crisis has on their bank accounts.

The book is an illustration of great intelligence and achievement of the author in producing such remarkable work. The author clearly displays his skills and brains as he explains financial concepts that would have been incomprehensible to a layman, in a clear and witty language. The author skillfully takes the reader through the unnerving details in a simple and humorous way. This is the best account that I have ever read about the financial crisis.

Bibliography

Lanchester, J. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

Footnotes

¹ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

² J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

³ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁴ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁵ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁶ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁷ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁸ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

⁹ J. Lanchester. Whoops: Why everyone owes everyone and no one can pay. London: Allen Lane, 2010.

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Whoops: Why Everyone Owes Everyone and No One Can Pay

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