Neither A Lender Nor A Borrower Be

by Theodore Dalrymple (Oct. 2008)

 

The day after I arrived in New York, Lehman Brothers, the investment bank that had been in business for 158 years, collapsed. By the time I left a few days later, Merrill Lynch had undergone a distress sale and the American government, given the choice between apocalyptic financial panic and the bottomless pit, had chosen the bottomless pit and bailed out (and taken over) the giant insurance company, AIG.

 

I arrived back in Britain, the land of my residence for six months of the year, to learn that one of the largest banks in the country, Halifax Bank of Scotland, had been taken over by Lloyds Bank to prevent an undignified and potentially catastrophic run on HBOS, which would otherwise almost certainly have happened. It seemed as if my arrival in countries was a bad augury for the financial markets, and I decided to stay put for a while, just in case there really was a causative relationship.

 

Canvassing the opinion of friends and acquaintances as to the meaning of all this financial turmoil, I began to feel like a share in one of those vulnerable companies that would seesaw wildly in value on the stock exchange, according to the latest rumour, the day before it either collapsed completely or was rescued by one expedient or another. Some would say that the crisis was at most an epiphenomenon, and that the real economy, the one that baked bread and made nuts and bolts, would continue unaffected. Others would say that this was the beginning of the end, that we should all spend the rest of our lives struggling to make ends meet, eking out a bare subsistence, and that we should never feel secure and prosperous again. I swung between complacency and terror, until I finally took refuge in the thought, implanted in my mind by a scribbler of my acquaintance some time during the last episode of financial panic, that during recessions and depressions the demand for journalism and other forms of writing goes up rather than down, reading being a comparatively cheap form of entertainment. Wishful thinking easily attains the status of truth, and so I concluded, on the basis of what was no more than an obiter dictum, that at any rate I should be all right. This conclusion, of course, did not take into account the epidemic of education-induced illiteracy since the last panic.

 

By no means a financial wizard – my love affair with money has thus far remained unrequited – I could not help thinking that the episode, whether it prove fleeting or of limited duration and minor consequence, was not without an important cultural dimension. Everything that happens tells us something about the way we live now, even when what happens is not entirely without precedent (every banker, broker and hedge fund manager ought to read, mark and inwardly digest Charles Mackay’s Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, first published in 1841 and scarcely out of print ever since, itself a powerful evidence of the inability of most of mankind to learn from the experience of others).

 

Of course, one’s assessment of the cultural significance of events depends upon one’s understanding, whether true or false, of their causation. Therefore, in what follows, I am depending upon my no doubt somewhat schematic understanding of the turmoil on the Anglo-American markets. It is therefore only right that I should state what my understanding is, before launching out on my main observations. If my understanding is fundamentally wrong, then my other observations are null and void.

 

Large quantities of money result in easy credit, and easy credit inflates the value of assets such as houses. This in turn means that houses, whose prices appear to be rising effortlessly like a good souffle, become collateral to loans to people who would otherwise not merit loans.

 

The banks and mortgage companies, whose business, after all, is lending money, did not enquire too closely into the biographical record of their borrowers. Indeed, those who sold mortgages often had little connection to those who lent the money: rising prices would take care of any risk inherent in ignorance or fraud.

 

Financial instruments were concocted that successfully hid the very hazardous nature of this way of recycling money. I remember receiving a few years ago a brief tutorial from someone by no means stupid on the way in which mathematically gifted people on Wall Street had found a formula that successfully eliminated all risk from extending large loans to numbers of people who had never previously displayed any tendency to prudence or probity. I didn’t believe it; but, not being mathematically gifted, I found myself rather in the position of Diderot when Euler, according to legend, presented him with a mathematical formula allegedly proving the existence of God. Diderot had nothing to reply because he didn’t know mathematics; and therefore I also kept my counsel about the lending of money to people with no capacity, let alone inclination, to pay it back.

 

However, the instruments created were so convoluted and distant from any concrete reality that those who believed in them were ignorant of their foundations. They believed in them as peasants used to believe in miracle-working Virgins.

 

Now pyramid schemes of this nature work splendidly for a time, and those who get out before the denouement, or manage to extract enough from them before they collapse, make a fortune. That, of course, is why they recur through history: many lose in the end, but a few gain, and gain astronomically, in the meantime. Mankind is a herd to be fleeced, and luckily the wool always grows back.

 

Let us now consider some of the cultural implications of what has happened. A few words seem to sum it up: improvidence and lack of probity. But whose, exactly, and in what proportion and with what implications?

 

The butcher and the baker, upon whose benevolence Adam Smith famously told us that we do not rely for the quality of our meat and bread, are kept in line by the evident and close connection between how they conduct themselves and the profit that they make. In other words, their self-interest guarantees their providence and probity; assuming they have no natural or unnatural monopoly, they would go out of business very quickly if they passed off measly pork and adulterated bread as the finest that money could supply.

 

But the connection between such virtues as providence and probity on the one hand, and reward on the other, is – it must be confessed – somewhat attenuated in the modern world of capitalism. There are so many steps between raw material and final product, or between the initiator of a productive process and the final consumer of whatever it is that is produced, that there is plenty of opportunity for the vices corresponding to providence and probity to operate and flourish, at least long enough for those who display them to line their nest with feathers of gold. This makes providence and probity all the more desirable, of course.

 

I don’t think there is much doubt that the banks, in my own country at any rate, have been improvident and lacking in probity. If I may descend for a moment from abstraction to anecdote, I will recount my experiences with my own bank over the years that illustrate a change not just in its attitude to credit, but in our culture.

 

Shortly after I opened an account there, forty years ago, I received a letter from the manager drawing my attention with some asperity to the fact that my account was almost $5 dollars overdrawn, and that he trusted that I would soon rectify the situation by the end of the week. Forty years later, when I was again overdrawn, I received a telephone call from the manager – the bank’s motto being ‘Don’t call us, we’ll call you’ – asking to see me. Indeed, the manager said he would come to my house.

 

Gosh, I thought, now I’m in trouble. When he arrived, I told him that I was about to pay the amount by which I was overdrawn into my account. He looked extremely crestfallen.

 

‘You mean you don’t want to borrow more?’ he said. ‘I’ve come here to offer you more.’ A wasted journey, obviously.

 

A short time later, I went to my bank to borrow money to buy a house while I sold another. Within five minutes I was offered a sum the like of which I had never previously handled, and in excess of anything I needed. While it was smaller than my total nominal assets, as I enumerated them, the bank made absolutely no effort to verify that I was indeed the owner of these assets.

 

With a large loan outstanding, I continued to receive, about every month or so, offers of a further loan of $50,000, no questions asked and mine for the borrowing by mere telephone call, just in case there were any little extras or extravagances I happened to feel like treating myself to (but apply now, before next month’s offer of precisely the same thing!). The principal example given of the little extras or extravagances to which I might want to treat myself was the holiday of a lifetime.

 

Two considerations led me to turn down all these kind offers. The first is that my taste in holidays of a lifetime runs more to observing civil wars than to lolling in the lap of luxury, and while sometimes expensive to go to, civil wars offer little in the way of sybaritic possibilities (though there was a surprising availability of pink champagne during the Liberian civil war, even if it was difficult to chill).

 

The second consideration was the faintly puritanical belief, no doubt the psychological consequence of having been born only a few years after the end of the Second World War, that if one could not afford to pay cash on the nail for the holiday of a lifetime, one could not afford the holiday of a lifetime. One did not go deeply into debt for the sake of evanescent pleasures, such as that of a couple of weeks’ sitting under palm trees by a lighted pool in the tropical sunset, waited upon by obsequious, and no doubt secretly resentful, flunkies.

 

Even allowing for the change in my personal circumstances over the forty years, the irresponsibility of the bank (and other financial institutions) seemed to me – if one absented a knowledge of history, that is – astonishing. There is no doubt, however, that many people, in fact many millions of people, listened to the siren song of easy credit, of fritter now, pay later.

 

The interesting question for me, then, is not that of the foolishness or dishonesty of the financial institutions, but that of the population. At what point did the population come to believe that it was possible (to cite the advertising slogan of a new credit card launched in Britain in the 1970s) to ‘take the waiting out of wanting’?

 

Let us try to imagine what it is to be a sub-prime borrower, or indeed a borrower of any kind who over-extends himself and goes into debt for trifles light as air, for the procuring of what will predictably bring him no more than a few moments’ satisfaction, soon to be followed by a further fevered search for a few more moments’ satisfaction.

 

When I sought my large loan from the bank, I – who have by no means maximised my economic opportunities throughout my life, or behaved with squirrel-like wisdom and foresight, believing in my twenties, for example, that I would never survive to my present great age – considered such matters as to whether, in the event of not selling my other house, I should still be able to service my debt; whether I could find other means of paying the loan back; what happened if interest rates rose and my income fell; etc., etc. These did not seem to me to be terribly difficult thoughts, indeed they seemed rather obvious ones, almost coterminous with the decision to seek the loan, and certainly with the signing of the agreement. Yet it now appears that millions of people, in my own country and elsewhere, have not thought such thoughts, and this is really rather depressing. I suppose they thought they were getting something for nothing; the more sophisticated among them probably realised that, since they had no assets to speak of, they had nothing to lose. But I am not sure that mass lack of probity is much better than mass lack of providence (the question would make an interesting one for a student term paper).

Be that as it may, all these people are voters, who have the future direction of their country in their hands, at least in so far as a choice between candidates for office makes any difference to the direction their country takes. The future, it seems, depends upon the dishonest and the improvident. This is not altogether reassuring, at least in the abstract, until one considers the behaviour of the class from whom the candidates usually emerge. It takes a thief to elect a thief; and in the imperfect sublunary world, perhaps that is the best to which we can aspire. At any rate, I prefer it to the unrestricted reign of honest men.

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