Appetite for Destruction

Money Mania: Booms, Panics, and Busts from Ancient Rome to the Great Meltdown BY Bob Swarup. Bloomsbury Press. Hardcover, 320 pages. $27.

If you like the idea of efficient markets, then Bob Swarup’s Money Mania is not the book for you. Swarup, who has a Ph.D. in cosmology but has spent most of his career in the world of high finance, delivers this scabrous appraisal of those who cling to the misconception that humans are rational: “The dedicated economist is a learned nymphomaniac in theory, his or her virginity still intact due to never having actually met a real human being on their academic travels.” In his view, we are not so much Homo economicus—the ideological construct much beloved by those selfsame rationalist economists—as we are Homo emoticus: We are easily influenced by our peers, and in our blind pursuit of money, we go all-in on all sorts of things that will, in retrospect, seem absurd, embarrassing, or worse.

Perhaps the book’s most compelling illustration of this point is Swarup’s description of the famous experiment conducted by psychologists Daniel Simons and Christopher Chabris. In this exercise, people watch two teams playing basketball, one wearing white and one wearing black; the researchers then ask their subjects to count how many times members of the white team pass the basketball to one another. The participants in the study fixate so intently on the task before them that they fail entirely to notice the wild card the researchers throw in: a giant gorilla that walks across the screen thumping its chest.

As Swarup notes, financial manias follow the same general pattern: The people pumping up the bubbles, and succumbing to the associated delusions of crowd psychology, don’t see what’s right in front of them. And those who argue that bubbles are rational, because they seem to be supported by fundamentals, miss the much larger point—that fundamentals themselves are a product of our own myopic hopes, dreams, and beliefs.

Swarup’s book is a rich, anecdote-driven account of the way money—a human creation that we nevertheless cannot control—combines with the frailties and vagaries of our human psyche to create bubbles and their inevitable ugly aftermaths. It’s a much-needed dose of common sense and old-school philosophy that should be injected into the mind-boggling debate over whether all the current fixes to the financial system, from Basel III to the Volcker Rule, really fix anything. As we size up these various remedies for the deregulated excesses of the great global 2008 meltdown, we would do well to remember that any version of the world that seems to be organized, rational, and controlled is an illusion. Or as Swarup puts it:

Easy money is not normal. . . . This is normal: A complex world where emotion and money leverage off each other, binding us into vast instinctive herds that charge into uncertainty, striving only for forward movement with little regard for the terrain beneath our feet, running headlong into the myopic horizon and stumbling, only to pick ourselves up, shake our heads, and resume the pursuit of our peers once again.

One of the myths of a predominantly rational market that Swarup dispels is the idea that crises come out of the blue. To underline this point, he takes us on a great (and detailed) romp through the history of financial crises. He shows how the ancient Greeks, the famed progenitors of philosophy, drama, and epic poetry, also gave us the West’s first financial panic, in 377 bc, when ten Greek city-states borrowed heavily and then defaulted on their debt to the Temple of Apollo at Delos. He also revisits the social tensions between creditors and debtors in ancient Rome that helped give rise to Marx’s notion of the proletariat (as Swarup points out, the word derives from the Latin proletarii, meaning the lowest rung of Roman society). And he doggedly traces many of the same basic forces at play when he recounts a host of other investor-driven manias, from the European panics preceding the Second World War to the long backstory behind Japan’s stubborn financial bubble. I’m sure historians will accuse him of too blithe and simplistic an explanation of events, but it’s a useful one, given that historians often ignore economics and vice versa.

As Swarup lines up this parade of global self-delusion in financial affairs, he delivers plenty of insight worth pondering. He writes that we are attracted to money because of the seeming certainty it provides, and yet, he says, “that same medium emphasizes inequalities between us and eventually widens them by giving our innately competitive natures a simple means of keeping score.” He notes that economic crises are always, at bottom, an issue of trust: “That same knife edge of trust that allows every bank to take liquid deposits from us and return illiquid loans back to purchase whatever takes our fancy is sharpened by euphoria till it glides through our illusions and fancies to reveal our base human motivations and fears.” And he talks about “the fetish of GDP.” “Long the sacred cow of policymakers and economists, it is deemed synonymous with human progress,” he writes. “But few ever ask what the concept of GDP means. Not all growth is the same. GDP is a measure of spending.” He can also be a strikingly original writer, such as when he talks about how our biases influence society. “Our proclivity to extrapolate the recent past into the infinite future captures one mind, then another and another, till eventually large swathes of impressionable grey matter labour like galley slaves under the illusion of intelligence,” he writes.

Still, Money Mania has its flaws. For starters, Swarup has a tendency to layer on lots of words. He prefers flowery expressions to simple clarity, and this tic can make his thoughts more difficult to understand. More serious, there are holes in his argument, and some underlying tensions in his ideas that he doesn’t reconcile.

For instance, Swarup has a clear admiration for the overreach of swashbuckling financiers; his assessments here seem to have a lot in common with Joseph Schumpeter’s famed notion of “creative destruction” as an inherent feature of free-market economies. “It was likely a speculator who left his milk out too long one day and discovered cheese; and possibly, a greater fool who came to the party even later to discover blue cheese,” Swarup writes. He quotes Alexandr Solzhenitsyn in the same vein: “If one is forever cautious, can one remain a human being?” The railroad bubble in the United States in the late 1800s left in its wake a vast new infrastructure that helped build a great country, and the dot-com bubble produced companies and technologies that have changed the world.

It’s all so true, and, solely on the basis of this view of things, who would want to stamp out financial manias if doing so meant killing off entrepreneurship? But there is creative destruction, which leaves something of value standing in the ruins, and destructive destruction, like the housing bubble, which leaves nothing behind—apart from molding houses that need to be torn down. Swarup doesn’t attempt to distinguish between those two.

There’s also a tacit sort of fatalism in Swarup’s insistent focus on the deep commonalities shared among history’s great money manias: Yeah, financial crises happen, and they aren’t one person’s fault—so get used to them, and stop whining. This was the all-too-complacent view that JPMorgan Chase CEO Jamie Dimon famously took when his daughter asked him what a financial crisis was: “The type of thing that happens every five, ten, seven, years,” he replied. Broadly speaking, the view that “crisis happens” is shared by many financial executives, and it’s not hard to see why: Such jaded aphorizing exempts them from individual responsibility.

So there’s a certain knife-edge-of-trust issue when Swarup flirts with a version of the same what-are-you-gonna-do impotence before the grand sweep of historical financial fraud and folly: “We cannot take too narrow a view and focus on the fine details of any given crisis,” he assures his readers early on. It’s of course undeniably true that a larger framework of historical causation lurks behind every financial crisis, and that money manias are made up of many common elements across different epochs and investment communities. But in each crisis, there is also fraud and deceit and wrongdoing at a very individual level—the level of “fine details”—and to infer that such conduct should be ignored comes awfully close to excusing it.

Swarup also makes overly broad allowances for dubious market innovations. He repeatedly asserts, for instance, that the complexity of our modern world is a sort of necessary evil. As the nexus of money, credit, and tertiary financial instruments grows ever more dense and difficult to parse out, he delivers this rather airy appraisal of things:

One may see the transition as akin to the transition from an oxcart to a car. The latter will get you to where you want to go much faster but it also has far more moving parts that can break down unexpectedly. However, that is a compromise we make willingly every time because we value the added benefits.

When this desperately complicated status quo sinks into chaos and destruction, there’s not much to be done, either, he writes—unless we care to heroically deny our own natures: “Short of disowning progress and returning to small isolated communities, one cannot remove systemic crises. Even then, we cannot excise the ebb and flow of human emotion that arise from the biases within us all.”

And yet, despite his focus on the inevitability of all this, he says that he has an answer. The sure path forward, he argues, is to acknowledge the dynamic interaction of money and the human psyche: “There is no simple early warning system,” he writes. “Rather, the answers lie in understanding the human element and how it relates to money.”

But Swarup’s own work casts doubt on the idea that even the deepest understanding of our human biases and temporal limitations would make us able to overcome them and to see in the moment just what’s happening in our money-mad world. If there are specific tools beyond the rather vague notion of “understanding” that could have helped us in the past or could help us today, Swarup doesn’t identify them. At the end of the book, he does list a number of fixes for what ails the financial system. Among them, he suggests ending the fetishization of GDP. But if it’s human to want growth and progress, and to want to be able to measure that growth and progress, what exactly should we replace GDP with?

Not incidentally, Swarup also criticizes us for our reactions to crises. “There is the self-righteous belief—but always excusing oneself—that excesses need to be purged and speculation punished,” he writes. He adds that the “all too human wielders of those tools and the societal incentives that drove them are never mentioned.” Even a cursory review of the literature about the most recent financial crisis would show you that that’s not true; plenty of delusional bad actors have been exposed, together with the environments that shaped them. It may well be, despite Swarup’s many pleas for greater detachment in these matters, that attempts at explaining things in philosophical or historical terms just won’t satisfy the deep human craving to identify the villains responsible for any catastrophe. Maybe the reaction to the crisis is as inevitable, given our psyches, as the crisis itself.

Bethany McLean is a contributing editor at Vanity Fair and the coauthor of All the Devils Are Here: The Hidden History of the Financial Crisis (Portfolio, 2010).