MICHAEL CASEYreviews Out of Pocket: How collective amnesia lost the world its wealth, again, By Clark McGinn, Luath Press; €15

THIS IS an intriguing book by an experienced banker who happens to be an expert on the Scottish poet Robert Burns. Not surprisingly, the book expresses its themes with literary flair.

The main theme of the book is encapsulated in the title, but it is given fuller treatment in the following paragraph and is worth quoting:

“The crisis involved all of us: consumers piling on credit . . . the banks leveraging up to hold assets they didn’t understand, governments gorging on the tax bills from bank profits and bankers’ bonuses, shareholders happily cashing their dividends and watching the share price skyrocket, economists who believed in their philosophies, not the reality of the world, rating agencies who unwittingly created a parallel and less effective rating system for toxic structures, central bankers who ignored asset inflation believing they could mop up the aftermath of any bubble, regulators out of touch with the big picture, journalists and politicians who were silent.

“That’s a lot of actors on the stage of this tragedy: not just a soliloquy from the guilty banker.”

While one might be tempted to change a word here and there, this paragraph is a pretty good summary of the disastrous events leading to recession and financial collapse. The psychology behind such catastrophic events is simple. Greed drives markets up and fear makes them crash. Greed and fear are part of human nature and, when combined with “collective amnesia”, guarantee that crises will occur again and again.

To prove the repetitive (or cyclical) nature of financial history, the author takes us through most of the previous crises, ranging from tulipomania to the South Sea Bubble, from the Mississippi Purchase to the first Ponzi (pyramid) scheme, from the Great Depression of the 1930s to the dotcom bubble and the present financial meltdown.

He provides considerable detail on each of these manias but he does not go the extra step of drawing out the basic errors in a thematic way. Presumably, what all these schemes had in common was a bidding up of asset prices (land, shares or tulips) way beyond fundamental values, in the hope of selling out at the top of the bubble.

Some speculators got the timing right, most did not. Greed made them hold the assets for too long. Sometimes the crisis precipitated major political upheavals. For instance, the Mississippi Purchase led indirectly to the French Revolution because the nobility managed to protect their wealth while ordinary people suffered the consequences. (Does that sound familiar?)

The author takes us skilfully through the mechanics of derivative products, their misuse and consequent failure to eliminate risk, the dangers of leveraging and the ineptitude of financial regulation.

There is a wide divergence of opinion on derivatives. Practical investors such as Warren Buffet call them “weapons of mass destruction”, whereas most academics see them as a good thing – “completing the market”, as the saying goes.

Indeed, Alan Greenspan welcomed subprime lending on the grounds that it was a useful market innovation! The author could have given us a little more on this crucial debate about the costs and benefits of derivatives.

In the final section, he deals with the main laws of banking and how and why they were broken. The principal mistake was the fall in asset quality, partly due to lower standards regarding collateral.

Huge bonuses represented another failure; some investment banks devoted 90 per cent of income earned to pay and bonuses!

Many poor securities were sold to ordinary people and institutions even though the bank concerned regarded the assets in question as “pieces of junk” – along with greed went dishonesty.

This book is colourfully written. It could, however, grate on the nerves of readers who find it difficult to laugh at the jokes of a senior banker.

In this respect, the author does himself no favours by writing: “I started this book three years ago to amuse my fellow bankers. Little did we all know what was about to happen. But we should have. Sorry.” Above this quote is a picture of the author wearing a huge smile.

He gives witty definitions in a glossary of terms. Bad Bank, for example: “Most of them, I hear you say, or hear you singing a wistful song ‘where have all the good banks gone?’ ”

Maybe he did amuse his fellow bankers with such witticisms, but it is unlikely his book will amuse members of the public who have lost jobs, homes, pensions, overdraft facilities, shareholdings, or taxpayers who will be scourged for years as they bail out the amused bankers.

It is difficult to accept the author’s contention that financial crises are inevitable. He admits he has no solutions to offer because there aren’t any; we are doomed to have more crises.

He finds the “righteous indignation of some of today’s commentators hard to swallow”. This is rich, but it is also far too deterministic. It is a convenient way for bankers to exonerate themselves.

In other words, bankers are just one set of actors among many others who are bound by some historical imperative to repeat mistakes. This notion suggests there is no learning capacity in humans. If calamities are pre- ordained, then there is no need for bankers or anyone else to try to improve things. This is moral hazard gone mad.

The correct response of governments to this contention is to toughen bank regulation, impose special levies on banks as a form of self-insurance, eliminate bankers’ bonuses and slash executive salaries, introduce a Tobin tax and penalties, including imprisonment, for any deviations from good governance.

This would ensure that financial crises are not inevitable.

Michael Casey is a former chief economist at the Central Bank and board member of the International Monetary Fund.