Making cents of it all: If knowledge is comfort, two books about debt could help allay our fears, confusion about the economy

Nov 23, 2008 (Houston Chronicle - McClatchy-Tribune Information Services via COMTEX) -- BPTTF | Quote | Chart | News | PowerRating -- I don't know about you, but when the stock market tanks, my thoughts turn to books about debt. Not self-help, how-to-get-out-of-debt books, but books that give the Big Picture, that show how ubiquitous it is, common as dirt, American as apple pie. Knowledge is comfort, I like to think.

To that end I turned to Payback by the Canadian novelist Margaret Atwood and The Ascent of Money by the iconoclastic British historian Niall Ferguson, both just out. Together they make for entertaining, challenging reading, particularly if you're an English major like me and thus count as an economic illiterate.

Mention debt and most people think of money debt, but the concept has far wider application, and that's what interests Atwood. What we owe, what we must pay back, whether someone else will shoulder our debt, how we respond to those who don't make things right -- these find their way not only into our financial dealings but also into our love affairs, even our sense of how the cosmos works. The debtor-creditor category seems to be everywhere.

"This concept -- that there is an underlying balancing principle in the universe, according to which we should act -- appears to have been almost universal," Atwood writes. Hinduism has its wheel of karmic justice, the Chinese have the Tao or Way. In Christianity Jesus sits at the right hand of God the father almighty, judging the quick and the dead.

"As we sow, so shall we reap, or that's what we'd like to believe," Atwood writes. "And not only that, but someone or something is in charge of evening up the scores."

"Sin-eaters" intrigue Atwood. Someone owes a debt and can't pay, the sin-eater, a figure that crops up in various cultures, "steps forward and pays the debt, or takes the place of the indebted one." She ferrets out sin-eating in Sumerian mythology and in folk practices of rural Britain. And of course it lies at the basis of Christianity -- who is Jesus if not the ultimate sin-eater?

Memory, writing and debt intersect for Atwood. The concept of debt presupposes the ability to remember. Writing, Atwood says, seems to have been invented as a way to record -- and thus remember -- numbers and debts. Primitive financial records predate written literary and religious texts, she says. The tradition that the devil keeps an account book may have originated in the fear and bafflement with which illiterate people contemplated these strange markings on stone or papyrus or whatever.

"Indeed the Devil of the early modern period bears more than a passing resemblance to a tax collector or punitive landlord, waving around infernal soul-for-money contracts like the stage villain of a melodrama come to extract the overdue rent and molest the teenage daughter," Atwood writes.

Or as she puts it elsewhere, what is the legendary pact with the devil if not the first buy now, pay later scheme. Hell, a place where you pay and pay but never get paid up, she likens to "an infernal maxed-out credit card that multiplies the charges endlessly."

You'll hear more than you want about Ebenezer Scrooge and Charles Dickens' A Christmas Carol in Payback, but the literary reference that caught my eye was a quote from Samuel Johnson, the great 18th-century man of letters who came close to a stay in debtors' prison himself. Johnson wrote in an essay:

We have now learned that rashness and imprudence will not be deterred from taking credit: let us try whether fraud and avarice may be more easily restrained from giving it ... Those who made the laws have apparently supposed that every deficiency of payment is a crime of the debtor. But the truth is, that the creditor always shares the act, and often more than shares the guilt, of improper trust.

Print that up and send it back in the prepaid envelope that comes with the credit card solicitations blizzarding your mailbox. And then persuade Johnson's ghost to testify when Congress debates what to do to prevent a recurrence of the subprime mortgage disaster.

Which gives me my segue to Niall Ferguson's The Ascent of Money, the most useful part of which is his long chapter chronicling how the dull, white-bread home mortgage morphed into a fiendish financial instrument that threatens to bring down the world economy.

Financiers, financial institutions, the movement of money around the world-- how all this came into being and how it all interrelates form Ferguson's theme. And he's a cheerleader for his subject.

"The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong," he announces in his introduction.

Ferguson completed the book last May, when financial markets were shivery but hadn't yet frozen entirely. He was tentative as he looked ahead. He clearly saw the possibility of major financial crisis, and as a historian he knows what that could mean. Speaking of the first era of financial globalization, in place by the early 20th century, he writes that the beginning of World War I blew the whole system apart in days and that it took more than two generations to fix. Not good.

"Are we on the brink of a 'great dying' in the financial world" like the one that killed off the dinosaurs? he asks. It's "a scenario that we should worry about."

At the same time he also worries that excessive rules and regulations aimed at protecting companies and consumers and workers will strangle innovation and initiative.

But Ascent of Money isn't primarily about policy but about history. What I discovered is how much older certain financial instruments were than I thought, how much younger others were.

Government bonds, for example, go back to the Renaissance, when the Italian city-states floated them to finance their wars. They really took off in 18th-century Britain.

Ferguson tells how the Civil War saw the Confederacy try to float government bonds backed by cotton. It could have worked, generating millions for the South. But the Union capture of New Orleans choked off the ready export of cotton, ultimately dooming the scheme. The South was reduced to printing worthless paper money, with the predictable results.

He recounts the rise of the joint-stock company and the first stock market in Holland in the 17th century. From the beginning, we learn, stock traders engaged in short-selling. The Dutch survived it so maybe we can too.

Readers too young to have lived through the Depression probably don't realize that home mortgages barely existed before the 1930s. Prior to that, Ferguson writes, fewer than half of American households were owner-occupied, and mortgages typically ran for short periods, three to five years. You paid only interest until end of the loan term, then paid the principal in one lump sum.

The evolution of the subprime mortgage crisis gets extended and largely illuminating treatment. I still don't understand derivatives, but now I do understand how it transpired that municipalities in Norway came to own dubious bonds backed by NINJA mortgages in America. That's NINJA as in "no income, no job or assets."

I know I said knowledge is comfort, but I won't pretend that reading these two books made looking over my 401K any less painful. Sometimes you have to settle for knowledge as its own reward. I take comfort in that. And in knowing I pay off my credit cards, in total, every month.

fritz.lanham@chron.com

fritz.lanham@chron.com

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