The New Yorker August 4, 2014
The most important mystery of ancient Egypt concerned the annual inundation of the Nile floodplain. The calendar was divided into three seasons linked to the river and the agricultural cycle it determined: akhet, or the inundation; peret, the growing season; and shemu, the harvest. The size of the harvest depended on the size of the flood: too little water, and there would be famine; too much, and there would be catastrophe; just the right amount, and the whole country would bloom and prosper. Every detail of Egyptian life was shaped by the flood. Even the tax system was based on the level of the water, which dictated how successful farmers would be in the subsequent season. Priests performed complicated rituals to divine the nature of that year’s flood and the resulting harvest. The religious élite had at their disposal a rich, emotionally satisfying mythological system; a subtle language of symbols which drew on that mythology; and a position of unchallenged power at the center of their extraordinarily stable society, one that remained in an essentially static condition for thousands of years.
But the priests were cheating, because they had something else, too: Nilometers. These were devices that consisted of large, permanent measuring stations, with lines and markers to predict the level of the annual flood, situated in temples to which only priests and rulers were granted access. Added to accurate records of flood patterns dating back for centuries, Nilometers were a necessary tool for control of Egypt. They helped give the priests and the ruling class much of their authority.
The world is full of priesthoods. On the one hand, there are the calculations that the pros make in private; on the other, elaborate ritual and language, designed to bamboozle and mystify and intimidate. To the outsider, the realm of finance looks a lot like the old Nile game. In The Economist, not long ago, I read about a German bank that had some observers worried. The journalist thought that the bank would be O.K., and that “holdings of peripheral euro-zone government bonds can be gently unwound by letting them run off.” What might that mean? There’s something kooky about the way the metaphor mixes unwinding and holding and running off, like the plot of a screwball comedy.
It’s the same when you hear money people talk about the effect of QE2 on M3, or the supply-side impact of some policy or other, or the effects of bond-yield retardation or of a scandal involving forward-settling E.T.F.s, or M.B.S.s, or subprime loans and REITs and C.D.O.s and C.D.S.s. You are left wondering whether somebody is trying to con you, or to obfuscate and blather so that you can’t tell what’s being talked about. During the recent credit crunch, many suspected that the terms for the products involved were deliberately obscure: it was hard to take in the fact that C.D.S.s were on the verge of bringing down the entire global financial system when you’d never even heard of them until about two minutes before.
Sometimes the language of finance really is obscure, and does hide the truth. The 2008 implosion featured many such terms, epitomized by financial instruments with names like “mezzanine R.M.B.S. synthetic C.D.O.” More often, though, it’s complicated because the underlying realities are complicated. The lack of transparency isn’t necessarily sinister, and has its parallel in other fields—in the world of food and wine, for instance. The French word baveusemeans, literally, “drooling,” which, in the context of food, we would all agree, is not a good look. Baveuse, though, is also used to describe the texture of a perfect omelette, where the outside is cooked and the inside is set but still faintly runny. It’s a useful term to know, because it helps you to recognize the thing more easily, but the cost is that you can talk about it only with other people who also know the term.
The language of money works like that, too. It is potent and efficient, but also exclusive and excluding. Explanations are hard to hold on to, because an entire series of them may be compressed into a phrase, or even a single word.
When I was growing up, my father worked for the Hongkong and Shanghai Banking Corporation. His kind of banking wasn’t at all the fancy go-go modern investment banking that wrecked the global financial system in 2008. It involved lending to small businesses to get them started. At home, my father couldn’t bear to talk about money; his own father had been the type of control freak who uses money to express that control. If I brought up the question of my allowance, it appeared to cause him actual physical pain. On the other hand, when the subject was at one remove, he was vivacious and funny at telling stories and explaining how things worked, so much so that, forty years later, some of the things he said still make me smile. When he first joined the bank, it had a telegraphic codebook for communicating with the head office, in Hong Kong. The codebook quoted a typical message: “The marketplace is dominated by small Manchurian bears.” Dad explained that the message indicated the influence of pessimistic small-scale investors who were either based in Manchuria or had made investments there. What I liked was the image of those bears, which I imagined were like the small bears in a Tintin book, causing the market stallholders to flee in terror as they rampaged among the carts and awnings, on a furious quest for nuts and honey. Even as a child, I was struck by the fact that the decoded phrase itself was in need of further decoding. But the fact that my father worked in the world of money gave me a sense that it was, and is, comprehensible.
Many people don’t have that advantage. They feel put off or defeated by anything having to do with money and economics. It’s almost as if they didn’t have permission to understand it. I did have permission to understand it, if I wanted to, and ten or so years ago, while working on a novel about contemporary London, I began to teach myself how. One of the things that happens to you—or, at any rate, happened to me—as a novelist is that you become increasingly preoccupied with this question: What’s the story behind the evident story? In my case, the story behind the story turned out to concern money. I realized that you can’t really write a novel about London and ignore the City—London’s financial center—because finance is so integral to the place that London has become. I started to grow more curious about the economic forces behind the surface realities of life. I wrote articles on Microsoft, on Walmart, and on Rupert Murdoch. I came to think that there was a gap in the culture: most of the writing on these subjects was done either by business journalists who thought that everything about the world of business was great or by furious opponents from the left who thought that everything about it was so terrible that all that was needed was rageful denunciation. Both sides missed the complexities, and therefore the interest, of the story.
That was how I ended up getting my education in the language of money—by following the subject in order to write about it. It wasn’t a crash course. For years, I read the financial papers and pages, and kept up with the economic news. Every time I didn’t understand a term, I’d Google it or turn to one of the books I was accumulating on the subject.
Take the earlier example of the German bank and The Economist ’s analysis that “holdings of peripheral euro-zone government bonds can be gently unwound by letting them run off.” What that phrase really means is this: the bank owns too much debt from euro-zone countries like Greece, Italy, Spain, Portugal, and Ireland, but, rather than sell it off, the bank waits for the loan period of the debt to come to an end, and then doesn’t buy any more of it. In this way, the amount of debt owned by the bank gradually decreases over time, instead of shrinking quickly after a selloff. In short, the holdings will be gently unwound by letting them run off.
Money people don’t need to explain that terminology to themselves, or to anyone to whom they’re in the habit of speaking. As for everyone else—you’ve already lost them.
What often vexes the language of money is something I’ve come to call “reversification”—a process by which words take on a meaning that is the opposite of, or at least very different from, their initial sense. Consider the term “hedge fund.” It baffles outsiders, because it’s very hard to understand what these Bond villains, as hedge-funders are in the public imagination, have to do with hedges. The word “hedge” began its life in economics as a term for setting limits on a bet, and showed up in that sense in the prologue to the Duke of Buckingham’s 1671 play “The Rehearsal,” a parody of the Restoration fashion for heroic moralistic drama: “Now, Critiques do your worst, that here are met; / For, like a Rook, I have hedg’d in my Bet.” The word “rook” is being used in the now obsolete sense of a cheat or sharpster. The idea is that, by putting a hedge around a bet, clever gamblers can delimit the size of their potential losses, just as a real hedge delimits the size of a field.
At its simplest, a hedge is created when you make a bet and at the same time make another bet on the other side of a possible outcome. Say that at the start of the season you’ve made a bet that the Green Bay Packers will get to the Super Bowl, at odds of twenty to one. You put down ten bucks. The team advances to the conference championship, where it’s playing the San Francisco 49ers. At this point, you decide to hedge your bet by putting ten dollars on the 49ers, who are three-to-one favorites to win the game. You’re guaranteed a profit, whatever the outcome.
The classic hedge-fund technique, created in 1949 by Alfred Winslow Jones, a sociologist turned investment manager, developed a more sophisticated version of the gambling strategy. Funds like his employed mathematical analyses to bet on prices going both up and down in ways that are supposedly certain to produce a positive outcome. This is “long-short,” the textbook hedge-fund method. But many hedge funds don’t follow such hedging strategies. A hedge fund, as the term is used today, refers to a lightly regulated pool of private capital, one that is almost always doing something exotic—because if it weren’t exotic the investors could benefit from the investment strategy much more cheaply somewhere else. There will be a “secret sauce” of some sort, usually a complicated set of mathematical algorithms meant to insure better returns than the market in general delivers.
Hedge funds defend the fact that they’re so lightly regulated on the ground that access to them is restricted to people who know what they’re doing and can afford to lose their money. They’re expensive, too: a standard fee is “2 and 20”; that is, each year you’re charged two per cent of the money you’ve invested in the fund, and also twenty per cent of any profit above an agreed-upon benchmark. But what these funds typically aren’t is hedged. Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.
A hedge is a physical thing. It turned into a metaphor; then into a technique; then the technique became more sophisticated and more and more complicated; then it turned into something that can’t be understood by the ordinary referents of ordinary language. And that is the story of how a hedge, setting a limit to a field, became what it is today: a largely unregulated pool of private capital, often using enormous amounts of leverage and borrowing to multiply the size of its bets. This is reversification in its full glory.
So is “securitization.” A good instinctive guess would be that the word has something to do with security or reliability, with making things safer. Not so. Securitization is the process of turning something—and, in the world of finance, this could be pretty much anything—into a security, a financial instrument that can be traded as an asset. Mortgages are securitized, car loans are securitized, insurance payments are securitized, student debt is securitized. In 2010, during Greece’s economic crisis there was talk that the government might try to securitize future revenue from ticket sales at the Acropolis. Investors would hand over a lump of cash in return for an agreed-upon yield; in this case, the money to repay the loan would come from tourists forking over cash for the privilege of wandering around the ancient monument. Another example of an exotic security is the Bowie Bond. In 1997, future royalties from David Bowie’s assets were sold to raise a lump sum of fifty-five million dollars. In effect, Bowie was saying, “I have a lot of money coming in over the next ten years from my back catalogue, but I’d rather have the cash now.” If Ziggy Stardust wants to stock up on shiny jumpsuits and needs his fifty-five million now, why not? Indeed, there is nothing inherently malign about securitization, any more than there is about most of the processes invented by modern finance.
But securitization, like other financial maneuvers, can be put to malign use. In the run-up to the credit crunch, certain kinds of loans began to be securitized on an industrial scale. By now, the story is familiar. An institution lends money to a range of different borrowers. Then the institution bundles the loans into securities—say, a pool of ten thousand mortgage loans, paying out an interest rate of six per cent—and sells those securities to other financial institutions. The bank that initially made the loans no longer gets the revenue from its lending. Instead, that money flows to the people who bought the mortgage-backed securities, and the institution that lent the money no longer has to care whether the borrower will be able to pay it back: the basic premise of banking—that you lend money only to people who can repay it—has been undermined. In addition, the risk of that loan, instead of being concentrated in the place that it came from, has been spread around the financial system, as people buy and trade the resulting security. In the credit crunch, securitization fuelled both “predatory lending,” in which people were loaned money they couldn’t possibly pay back, and the uncontrollable dispersal and magnification of the risks arising from those bad debts. There’s no way of knowing any of this from looking at the word “securitization.” That’s reversification at its least appealing.
Reversification is just as often at work with words whose meaning seems plain. That’s the case with “austerity,” perhaps the strangest piece of political-economic vocabulary to have come along in my lifetime. In everyday life, “austere” means simple, strict, severe. But that general quality doesn’t really refer to anything tangible, which is a problem, since what we’re talking about here is spending cuts. Funds are either cut or they aren’t. The word “austerity” reflects an attempt to make something moral-sounding and value-based out of specific reductions in government spending that result in specific losses to specific people. For people who don’t use any of the affected services—for the rich, that is—these cuts may have no downside. They’re a case of you lose, we win.
The images and metaphors keep doing headstands. To “bail out” is to slop water over the side of a boat. That verb has been reversified so that it means an injection of public money into a failing institution; taking something dangerous out has turned into putting something vital in. “Credit” has been reversified: it means debt. “Inflation” means money being worth less. “Synergy” means sacking people. “Risk” means precise mathematical assessment of probability. “Noncore assets” means garbage. These are all examples of how the process of innovation, experimentation, and progress in the techniques of finance has been brought to bear on language, so that words no longer mean what they once did. It is not a process intended to deceive, but, like the Nilometer, it confines knowledge to a priesthood—the priesthood of people who can speak money.
Using the language of money does not imply acceptance of any particular moral or ideological framework. Money person A and money person B, talking about the effect of, for instance, quantitative easing, may have different economic philosophies. Person A might be a free-spending Keynesian who thinks that quantitative easing—the government’s buying back its own debt from banks, companies, and sometimes individuals in order to increase the money supply—is the only thing saving the economy from an apocalyptic meltdown. Person B might think that it’s a formula for ruin, is already wreaking havoc on savers, and is on course to turn the United States into a version of Weimar Germany. They completely disagree about everything they’re discussing, and yet they have a shared language that enables them to discuss it with concision and force. A shared language doesn’t necessarily imply a shared viewpoint; what it does is make a certain kind of conversation possible.
This kind of conversation is worth having. The neoliberal consensus in economics presents itself as a set of self-evident laws. Low tax rates, a smaller state, a business-friendly climate, free markets in international trade, rising levels of inequality and an ever-bigger gap between the rich, especially the super-rich, and the rest—supposedly, these are just the facts of economic life if you want your economy to grow and your society to become richer. Many people are eager to tell us that there is no alternative to the existing economic order, that we have to accept things as they are. That isn’t true. Marx was right when he said that “men make their own history, but not under circumstances of their own choosing.” We didn’t create the world that we inherited, but we don’t have to leave it the way we found it.
My father once told me about the first colleague he ever knew to go to jail. This was in the fifties, in Calcutta, where Dad was his bank’s accountant, a rank roughly equivalent to deputy. A junior banker was found to have been stealing. He did it not to be rich but to fund a life style that was slightly more lavish than he could afford, so that he could have parties at which he served imported spirits and cigarettes, and slapped his guests on the back, and said, “Only the best for my friends, none of that Indian rubbish.”
“Every case I’ve known of people stealing from the bank has been like that,” my father said. “People wanting the thing they can’t quite have—that causes more trouble than anything else.” I think he’d have said that this phenomenon was now operating across entire societies, as people tried to cure rising income inequality by taking on debt. That life you can’t quite have? Borrow, and it shall be yours. My father, who had his generation’s horror of debt, would have shaken his head at that. He would have pointed out that when the finance industry says “credit,” what it really means is “debt.” If you don’t know that, you are likely to get into trouble.
The language of money is a powerful tool, and it is also a tool of power. Incomprehension is a form of consent. If we allow ourselves not to understand this language, we are signing off on the way the world works today—in particular, we are signing off on the prospect of an ever-widening gap between the rich and everyone else, a world in which everything about your life is determined by the accident of who your parents are. Those of us who are interested in stopping that from happening need to learn how to measure the level of the Nile for ourselves.