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Finance and Development, December 2015
Article

Book Reviews

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 2015
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The Jaws of Finance

Joris Luyendijk

Swimming with Sharks

My Journey into the World of the Bankers

Guardian Faber, London, 2015, 288 pp., £12.99 (paper).

Reality is complicated and the human mind can have a hard time grasping it. Events usually need an explanation, a causal source. The origins of earthquakes and other natural catastrophes are on some level easy to grasp: they just happen. No human hands involved. Social and economic events are often harder to understand or accept. They do not just happen. The human mind craves a cause-and-effect paradigm, which can give rise to conspiracy theories: the moon landing was a hoax; global warming is a fabrication of the liberal left; greed and collusion among unscrupulous bankers are behind the 2008-09 financial crisis.

How then does an investigative journalist transcend easy answers? Well, ask the people involved. Be humble, start with the most basic questions, and reach out to the widest sample of players. This is what Joris Luyendijk set out to do when the Guardian invited him in 2011 to blog about “understanding the financial sector.” After many postings and interviews with more than 200 staff members from large investment and commercial banks, hedge funds, financial supervisors, and others, Swimming with Sharks was born. The author’s quest: to discover what went wrong in 2008 and figure out whether the same type of crisis could happen again. His investigative work borrows from what anthropologists do, including by creating an analytical taxonomy for his analysis that he uses to divide his interviewees into three groups: front-office, high-profile traders; back-office support staff; and mid-office compliance and risk-management officers. He studied how members of the financial sector think by reading memoirs and exposés. Then he did field work, trying not to go “native”—meaning without letting his sympathies, biases, and emotions get in the way of analysis. A hard task.

Luyendijk’s answer: the 2008–09 financial crisis was not caused by individual character flaws, such as greed, which pervade human society. The crisis was caused by perverse incentives against a backdrop of a male-dominated, competitive culture that punishes (perceived!) failure swiftly. Scant job security has eroded people’s attachment to the institutions they work for, which may have encouraged excessive risk taking. Changes in the governance of large financial institutions from the investor-owner model (widespread till the 1980s) to the open capital model have limited shareholders’ ability to monitor risk taking and added to incentives to take extreme chances. Very large and complex financial firms created “too-big-to-fail” institutions that do not internalize the social risks of their actions.

The book is full of good anecdotal evidence—including some debunking the illusion that firewalls can prevent conflict of interest within financial sector institutions. Firewalls between investment bankers cooking up new financial products and those trading them and bank analysts advising clients on the quality of those assets were not respected. Rating agencies were soft on the risk associated with complicated derivative products, probably because they were paid by the owners of the underlying assets being rated. As Luyendijk states, firewalls in most financial sector firms are about as credible as the independence of “the Guardian if it were bought by a political party in England.” To close the loop of perverse incentives in the financial complex, supervisors and banks’ mid-office staff were mere window dressing as financial products became more complicated and the sector’s culture of “eat, drink, be merry, and do not show weakness” inhibited a critical mass of whistle-blowers.

The author’s quest: to discover what went wrong in 2008.

Luyendijk makes a good case against the argument that the great financial crisis of 2008–09 sprang from an organized, well-orchestrated conspiracy among fat cigar-smoking bankers. (He does not, however, spare a subset of calculating financial sector players he dubs “cold fish” in an entertaining story arc that nicknames each type of financial player.) After a thorough anthropological journey through the City of London, the forecast is bleak: nothing has changed. The competitive culture (with its scant respect for risk management, including through the demoralization of mid-office employees and the cult of successful super traders, the “masters of the universe”), too-big-to-fail institutions, and everything that underpinned the great financial crisis are still with us. The author ends the book with an “empty cockpit” as an image of our awareness of the risks of another crisis. Swimming leaves the impression that current regulatory and supervisory changes are like bike helmets for passengers on this accelerating plane. The rush for the few available parachutes will be intense when the next crash comes.

Marcello Esteväo

Deputy Division Chief, IMF Western Hemisphere Department

Young and Still Restless

Bessma Momani

Arab Dawn

Arab Youth and the Demographic Dividend They Will Bring

University of Toronto Press, 2015, 176 pp., $21.95 (paper).

For those readers who have consumed little information about the Arab region and its youth between the Arab-Spring-Fires-up-the-Arab-Street news cycle and the ISIS-Brings-back-the-12th-Century news cycle, Arab Dawn by Bessma Momani could indeed be the uplifting, hopeful antidote she hopes it will be.

For those with a more nuanced view of the region and its youth demographic, Momani’s book is a light addition to the tiny genre of literature on the future prospects of Arab youth, which includes Christopher Schroeder’s Startup Rising (2013) and Tarik Yousef’s Generation in Waiting (2009). Schroeder’s book offers richer, more inspiring portraits of entrepreneurs grappling with the region’s problems to build the change they want to see in their societies (disclaimer: my company is profiled in the book); Yousef’s contains deeper, more meaningful policy recommendations for the region’s economic development challenges.

What Momani’s book lacks in depth, however, it makes up for in new statistics and anecdotes about the region’s youth. It may come as a surprise to some readers that despite the negative news cycles, the young people who took to the streets are still agitating for change. Their efforts do not always make the front pages in the West, but the Saudi women who post YouTube videos of themselves driving their own cars around Riyadh and the Egyptian TV personality who exposes cultural hypocrisy in hidden-camera episodes are continuing the struggle.

These stories are not as dramatic as those of demonstrators toppling dictators, but given the pace of political reform we’ve seen in most of the postrevolution countries, they could prove to have a greater impact.

On religion, Momani can be praised for not trying to use statistics to tell us that Arab youth are more secular or more moderate than older generations. She tells it as it is: it’s complicated. Yes, 35 percent of entrepreneurs are women, and 80 percent of men think that women should be able to work outside the home—but 94 percent of women in Egypt wear a head scarf, twice as many as in their mother’s generation.

Some of the surveys and polls Momani cites that were published before Facebook’s 2009 “Like” button release should probably be discarded. Joking aside, the average three hours a day Arab young people spend on social networks has profoundly affected how they see the world and their place in it—even if they’re sitting in a blighted neighborhood in Cairo or Tripoli or Amman. This may be the first generation to embrace modern ideas and attitudes as a result of interacting with global culture online—bottom-up modernization independent of economic progress or government-led reform.

How these globally connected young people will respond to ever-rising unemployment is not addressed by Momani. She tells us the scary truth: 100 million additional jobs are needed by 2030. But her economic policy recommendations seem out of touch with present realities. For governments to provide more finance, infrastructure, and hospitality jobs in the private sector, as Momani writes, is simply not enough.

It’s not enough, for two reasons. The economic growth of the region will not support the job growth required. 100 million jobs by 2030 is just what is required to maintain present employment levels; unemployment is currently at 28 percent among Arab youth and 43 percent among Arab females, double the global average, according to the Arab Monetary Fund. With oil prices having dropped more than 50 percent in the last year and few experts predicting a rise back above $100 a barrel, it is unlikely that the GCC’s economies will help pick up the slack. The ravages of war on Syria, Libya, and Yemen mean a lost generation in those countries: the IMF’s Masood Ahmed has said that it will take 20 years of 3 percent annual growth for Syria to reach prewar income levels.

The young people are still agitating for change.

Second, the very nature of work is changing, and the skills economies will value are changing. The coming artificial intelligence revolution will leave many people everywhere behind—not just in the developing world.

The book does contain a seed of optimism, though the author doesn’t connect the dots for us. The Arab world is a wellspring of creativity. One in five Arabs can be categorized as a creative professional, and the skills they possess are rising in value. Within the life spans of the youth Momani portrays, machines will best human beings at just about everything—including building new machines, both the hardware and the software.

But where machines will have a harder time catching up with us humans is in our creativity, empathy, and ability to make human connections. This is the wealth of Arab youth, and this is where hope can be found.

May Habib

CEO and cofounder of Qordoba, an enterprise SaaS platform for globalizing digital content

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