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Regular version of the site

The Old Man and the Mortgage

On fictional characters' financial behaviour

© Alexander Petrov, 1999

Alexandre Dumas reveals some causes of economic crises, Ernest Hemingway explores financial decision-making, and Fyodor Dostoevsky offers his reader a glimpse into the minds of stock market players. IQ.HSE continues to read fiction from an economists' perspective: HSE Assistant Professor Henry Penikas takes a fresh look at some literary classics.

How to Provoke a Bank Run

There is hardly anyone who has not read The Count of Monte Cristo by Alexandre Dumas. But how many of us have noticed that this mid-19th-century adventure novel describes the same kind of crisis that affected the world in 2007-2009? The novel depicts what would later be called a banking panic or a bank run, i.e. a massive and sudden withdrawal of deposits from a bank,

This is the method used by Monte Cristo to take his revenge on the banker Baron Danglars. Edmond Dantes convinces the banker to give him 'unlimited' credit and to assign his obligations under promissory notes. But then the notes are presented for payment at the most unexpected moment, and the Count demands the money. 

Much later, in the 21st century, scared investors played the role of 'a collective Monte Cristo'. Panicked customers lined up outside the U.K.'s Northern Rock bank to withdraw their deposits; some even tried to use force, taking branch employees hostage. The outcome both in the novel and in real life was the same: the bank going bankrupt, unable to pay the enormous amount all at once.

From Borrowing to Begging

It would seem that The Old Man and the Sea by Ernest Hemingway has little to do with finances. Except perhaps the following dialogue. 'Do you think we should buy a terminal of the lottery... That's two dollars and a half. Who can we borrow that from?' the old man asks, and the boy answers, 'That's easy. I can always borrow two dollars and a half'. The old man replies, 'I think perhaps I can too. But I try not to borrow. First you borrow. Then you beg'.

Two and a half dollars is a lot of money for a poor man. Indeed, the World Bank's recent update sets the global poverty line at $1.9 per person per day. However, as their incomes decline, people tend to acquire a higher appetite for risk. The main reason why financial pyramid schemes persist is that people faced by hardship can often make desperate decisions.

Borrowing may be easy but overindebtedness can lead to personal and then to global crises. The 2007-2009 financial meltdown in the U.S. was triggered, in particular, by a rise in high-risk subprime mortgage lending leading to foreclosures which at first benefitted the bankers while U.S. home prices were high; then the housing bubble collapsed, leaving the borrowers in debt and the financial system in decline: first you borrow, then you beg; greed leads to poverty.

Chasing Losses

Some Russian classics also treat the theme of finance, e.g. The Gambler by Fyodor Dostoyevsky explores the psychology of financial speculations and the philosophical question of how to make money in a way which is sustainable and brings long-term prosperity.

Like gamblers in a casino, stock market speculators do not take time to think; they either buy to sell at a higher price or sell to buy cheaper, especially those nicknamed 'noisy traders' or 'pips traders' (from pip, percentage in point, the minimum unit of change in an exchange rate with an increment of 0.00001). The recently popular process of algorithmic trading uses automation to help traders make profits on pips by buying at 0.00001 less and selling at 0.00001 more. One can only imagine the turnover needed for these transactions to pay off.

Those who find this approach to trading impressive are highly recommended to read Dostoyevsky's novel, if only to imagine how it may feel to be constantly testing one’s luck and chasing one’s losses. The novel also shows that even if a gambler wins a jackpot, they are usually so careless with the money that it does not make them wealthier or happier in the long run.

Something about Being Russian?

Another important and philosophical question – how to make money in a way which brings prosperity – is only mentioned in passing in The Gambler.

According to the Englishman, Mr. Astley, roulette was a predominantly Russian game, because Russians had an inclination to ruin themselves for the sake of excitement. ‘But he is wrong! He is harsh and undiscerning as regards the Russian people generally', reflected Alexei Ivanovich, a gambler who had lost everything.

Or is it true that people in Russia, as opposed to those in the West, are not inclined to earn money gradually and accumulate wealth consistently with each new generation – as discussed in Privalov's Millions by Dmirty Mamin-Sibiryak – rather than take risks and chances?

Living off Interest

In Heaven Has No Favourites by Erich Maria Remarque, a character mentions that in the city of Basel 'a person is considered a spendthrift if he doesn't live on the interest of the interest'.

Remarque makes this reference for a reason. A major part of the world's financial history is associated with this small city. In around 1919, a bank was established in Basel, Switzerland, as a way to ease the process for Germany to make their reparation payments to the Allies after the first World War. Now it serves as the Bank for International Settlements and possibly, a repository of personal wealth. Therefore, people in Basel must be well aware of the importance of money and interest rates.

How much money does one need to live comfortably off interest and spend more than the meagre two and a half dollars a day like Hemingway's character? In Russia, with the current Central Bank's key interest rate of 6.5% p.a., one would need around $215,000, or 14 million rubles, in their savings account. But in Europe, with the European Central Bank's interest rate of 0.25%, i.e. 25 times lower than in Russia, one would need some $150 million or more than 9 billion rubles to maintain the same living standard.

Real-life Fantasy

Works of fiction discussing finances need to be understood in the context of their time. A vivid example is the currently popular Ayn Rand's Atlas Shrugged.

Having moved from the Soviet Russia to the U.S., the author sought to expose the shortcomings of both economies. Her book was published in 1957, years after Roosevelt’s New Deal had strengthened the role of the federal government, fought monopolies, and privatised strategic infrastructure such as railways and telecommunication facilities. In Ayn Rand's novel, big business faces restrictions, and the central planning policy attempts to encroach on the free market, while the most intelligent and future-minded people are fleeing to Atlantis, a legendary valley.

The protagonist is outraged that the banker Mulligan – who was worth about two hundred million dollars – would charge her 25 cents for the use of his car. Yet in response, she is warned that there is one word which is forbidden in the valley: the word 'give'. Indeed, it is a basic economic principle that when a person pays to get something, they are more likely to be reasonable and responsible in their decisions. Losing something which is not yours is one thing, but investing some of your own money in risky stock trading will force you to question whether the deal is worth it.

But on the other hand, some economic principles may become obsolete, and of course fiction should be taken with a grain of salt. Back in the 1950s when Ayn Rand wrote her novel, the gold standard – a monetary system where a country's currency or paper money has a value directly linked to gold – seemed unshakable. In the book, the gold dollar is the only currency minted and used in Atlantis. But in the real world, the gold standard had already come under criticism at the time and was eventually abandoned in 1971.

Think for Yourself

And finally, The Firm of Nucingen by Honore de Balzac.

The author depicts Nucingen as an evil ('Napoleonic') character and denounces one of Nucingen's transactions in particular as blatantly fraudulent, but wait ... The banker persuades people to give him money to buy shares in some American mines, promising big profits, but the shares fall.

Improper conduct? But he did not run away with other people's money; he just purchased the shares while they were cheap and profited when they went up. It's a matter of good financial management: you can add to your wealth during a crisis if you have enough capital. This story is not about the banker's lack of integrity but about his clients' lack of responsibility and financial literacy. Do not rely on promises but think for yourself and always remember, greed leads to poverty.


Author: Henry I. Penikas, December 07, 2019