Book review: Extreme Money

A history of extreme money

Satyajit Das’s latest book provides a history of money and, though not directly about the crisis, is an insight into the origins of today’s problems.
Satyajit Das, author of <em>Extreme Money</em>
Satyajit Das, author of <em>Extreme Money</em>

Spending an hour with Satyajit Das is an excellent cure for the head-in-the-sand optimism that typically emanates from the financial industry.

A former trader and author of several books on derivatives and finance, he is scathing of his former peers and most of the people running the global economy, whose suggested remedies he typically describes as “idiotic”, “incompetent” or “stupid”.

We met up earlier this month in a cafe in Tai Koo Shing, in Hong Kong’s eastern district, to talk about his latest book, Extreme Money, which went on sale in Hong Kong this week and charts what he calls the “financialisation” of the past 40 years — a series of steps from the collapse of the Bretton Woods system in 1971, through to the financial deregulation of the 1980s and 1990s, and the imposition of a global financial order through multilateral agencies such as the IMF and World Bank.

During this period, the world economy has changed in profound ways, typified by the extraordinary rise of the financial industry.

“When I went into banking in 1977, being a stockbroker was one step up from being a disreputable real estate agent and a banker was somebody who was like you’re favourite uncle, with eyeshades, cardigans and slippers,” said Das over a cup of coffee (which he eventually knocked over in a moment of animated enthusiasm).

Back then, the international financial industry was tiny — literally a few thousand individuals based mostly in London and New York. Today, the average international financial institution employs that many people in Beijing and the industry generates a huge amount of global economic growth in ways that very few people truly understand.

To Das, however, it is all relatively simple: the financial industry spurs growth by creating a seemingly infinite supply of debt, without regard for how (or if) it will ever be paid back. This is the world of extreme money, to which he provides an illuminating and often amusing introduction.

And, shortly after we met, UBS conveniently provided a real-world example of the risks of the dominant banking model when one of its traders lost a staggering $2.3 billion on its delta-one desk. It is inconceivable to most people working in the real economy that a junior employee could ever be in a position to lose billions of dollars of shareholders’ money — but such risks are routine in banking, where money is a raw material used to create more of itself.

Kweku Adoboli is conveniently described by his employers as a “rogue trader”, as was Jerome Kerviel at Societe Generale, yet in both cases there is very little evidence that either was trying to enrich themselves. Instead, they existed in a world where the value of money had become, in effect, meaningless — a world in which $1 million is commonly referred to as “a buck”.

But Das isn’t trying to pin the blame on financiers, or indeed on anyone. “Trying to find people to blame is really stupid,” he said. “Everybody’s culpable. I didn’t hear people complaining about the rising value of their house or stock portfolio or retirement fund — they didn’t want to know how the wealth was being created. Now that the game has stopped, everyone’s full of complaints about who did what to whom.”

Das says that the process of financialisation was, in part, an understandable reaction to the stagflation of the 1970s, when many people came to the conclusion that the Keynesian mixed economy had failed. Ronald Reagan in the US and Margaret Thatcher in the UK used strong mandates for change to implement sweeping deregulation that would affect financial markets in ways that nobody at the time could have predicted — and which are still not recognised by policymakers as a contributor to today’s banking problems.

Those reforms are often presented as a coherent free-market approach inspired by economist Friedrich Hayek and his seminal work The Road to Serfdom, but Das says that is delusional.

“They basically said: ‘This isn’t working, we’ll try something else.’ As they deregulated the financial sector, money started to go around and created more debt, which pushed the economy up, so they thought everything was great and decided to deregulate more.”

Even so, some of that deregulation was probably a good thing — previously, there were creditworthy borrowers who couldn’t get loans, so there was certainly some logic in freeing things up.

“To be honest, one side of this is that it did give growth,” said Das. “It did propel certain people out of poverty, it did help a lot of people along the way. But ultimately at a terrific cost, as we’re discovering.”

This is the seductive power of financial engineering. Creating more and more debt is a very effective way to accelerate consumption and generate growth, as long as you earn enough income to pay the debt back. But this did not happen.

“Eventually this engine became like a Doomsday debt machine,” said Das. “You needed more and more debt to make this thing work, until all the values became disproportionate and incomes weren’t sufficient to pay it back.”

Debt is very similar to a drug, according to Das. The more you use, the less effective it becomes, so you have to score more often and take bigger doses to get the same effect. Each percentage point of debt-driven economic growth becomes increasingly expensive until, eventually, you have an economy that is massively burdened by debt and barely growing at all. Welcome to the global economy in the 21st century.

Das describes this financially engineered wealth as “extreme money”, which is quite distinct from the real economy of goods and services that people pay for with cash. The legacy of the financial crisis, he says, will be the long, slow unwinding of this extreme money and a return to the real economy — or, to put it another way, a retreat from financial engineering back to real engineering.

Having said all this, Extreme Money is not about the financial crisis, as such. It is about the history of money and the journey that brought us to 2011. Das writes in a clear, straightforward manner that is approachable to all readers and takes in a diverse range of references from Hollywood movies to mediaeval literature, with plenty of gags and reflections from his career in the industry, which make for an easy read. It is on sale in most good bookstores.

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