John Lanchester -- I.O.U.: why everone owes everyone and no one can pay
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Good, understandable analysis of a very complex situation

What you will learn:

- A reasonably clear and understandable explanation of financial
  derivatives and instruments.

- A short history of the latest boom and bust, how it happened in
  the U.K. and the U.S., and some of the devastating effects in
  Detroit and Baltimore.

- Why and how we (humans) can't judge risk and shouldn't be trusted
  with our own money.  Also, why risk analysis models and programs
  help us to take on even more risk than we should have and to make
  even worse decisions than we would have.

- How things that were wrong were not detected by the people that
  should have and why.

- A short history of financial deregulation and of regulatory
  failure in both the U.K. and the U.S.

What's wrong:

- The values, both theirs and ours.  After all, many of us were the
  ones who maxed our credit cards and took on the mortgages we
  couldn't repay and consolidated our loans so we could borrow
  more and ...

- The system -- It's not just a few bad people in the system
  (though we had enough of those, too), it's the people that make
  up the system and the power that they have and way the system
  responds to those people.

- The influence -- Our government responds to pressure (a democracy
  should); but increasingly our government, in the U.S. responds to
  pressure from those that have money or power or both.  We are,
  according to Lanchester, like a banana republic, 3rd world
  country in that respect.

- The incentives - The pay and financial rewords for executives and
  for those working in the financial industry are misaligned. 
  Specifically, the financial sector gave huge rewords to those who
  took extreme risks, and it did not punish or give dis-incentives
  when those risks went wrong.

What to do about it -- Saying that we all should become better
people does not seem very helpful.  Voting the rascals out is
likely to produce another set of rascals.  And, better regulation,
which we are unlikely to get, only works when you have better
people to do the regulating, and vice versa.  We can hope that the
next crash will be bad enough to cause a change, though we'd really
be foolish to wish for a next time.  Perhaps "next time really will
be different".

04/06/2010

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