book review: I.O.U., Why Everyone Owes Everyone and No One Can Pay

By John Lanchester

Don’t understand the financial meltdown? Can't tell a derivative from a nominative? Want to understand securitization but don’t know where to begin? Looking for an easy to understand explanation of the meaning of life? Ok, well this book can do the first three. Look to another book to figure out the meaning of life.

Mr. Lanchester typically writes novels, but found, while researching the financial meltdown for his next novel that what the world really needed was a primer on what had happened in the financial melt down. So he wrote it.

The book contains all kinds of interesting tidbits: How long do you think a million seconds is? How about a billion? Ready for the answer: a million seconds is less than 12 days; a billion seconds is almost 32 YEARS. That’s right. Remember that every time you try to understand the differences in magnitude between a billion and a million.

Another factoid: in 2008 the Royal Bank of Scotland was THE LARGEST COMPANY IN THE WORLD (by asset size). Really? A bank. I find this interesting because a bank does not make anything, instead it moves money around efficiently. (I am reminded of Lloyd Dobbler in Say Anything...)

Another factoid: The Credit Default Swap was invented by J.P. Morgan to fund the clean-up from the Exxon Valdez. This was the only credit default swap J.P. Morgan completed.

A final factoid: As we most know the US credit scoring system is run by FICO. 60 percent of American’s credit score is between 650 and 799. The median score is 723 (half of households fall below and half above this number.)

Mr. Lanchester also makes the somewhat lacking argument that the fall of the Berlin Wall lead to the economic decline in the West because we were no longer competing against anyone. Therefore there was no incentive for the continued increase in living standards for workers. Something did change after the fall of the wall, I am just not sure that his theory holds up because it does not take into consideration other countries with whom we are competing such as China or the whole of the African continent.

The author also explores the varying attitudes toward household debt throughout the world. For example, the French have much lower household debt than do Anglo-Saxon economies. During the credit crunch, British households owed 160 percent of their average income. French households by comparison owed only 60 percent of their average household income.

As a follow-up book I want to read Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud, and Ignorance, by Richard Bitner.