I read Michael Lewis’ The Big Short: Inside the Doomsday Machine months ago, and have been feeling guilty about not recommending it, because this material is sort of essential for anyone who would like to understand how our economy ended up in the toilet. Read on, not just for a (spoiler: positive) review, but for potentially time- and money-saving advice.
Sidebar: Michael Lewis · I should disclose that I’m a hopeless Michael Lewis fan; in my review of Moneyball I wrote “I suspect there may not be a greater living writer of reportorial non-fiction” and yes, I still suspect that. So you could either use my admitted bias to discount this review, or alternately join the club and next time you see a Lewis book in the airport bookstore, just grab it.
Sidebar: Maybe Don’t Read the Book · The book has its roots in a November 2008 piece in Portfolio magazine, The End. I’m not actually sure that the book is a better piece of work than the (much shorter) essay; and I am pretty sure that all the really important lessons of the book are there in The End.
Now if you enjoy Lewis’ narrative of this frankly-incredible-even-though-we-all-watched-it-happen story, you probably want to get the book, just because there’s room for more narrative and the rest is mostly just as good.
But considered as a work of the non-fiction writer’s art, I’d have to favor the shorter version for its ruthless focus and pace.
The Story · It’s simple enough; Lewis found individuals and partnerships (three in the book, one in the essay) who decided the mortgage bubble was bullshit far before most others did, and made gobs of money betting it would pop, and he walks us through their experience. Most of their time doing this was pretty stressful, because a lot of apparently-smart people were betting against them every step of the way and taking home millions doing so. Even when it all fell apart and they got paid it was stressful, because they understood the scale of the disaster before anyone else.
Anyhow, they’re interesting people, the financial tools used both for inflating the bubble and betting against it are interesting too, and Lewis can tell a story with the best of them. Unless you’re oblivious to recent economic history, you’ll like it.
Lesson 1 · It’s one we should have learned already, long ago: The business of Finance is 100% about making big money for people in the business of Finance. Everything else is irrelevant. The party line is that it’s about routing capital from those who have it to those who need it in a maximally-efficient market-driven way. Hah hah hah.
There’s another legend that it’s about making money for investors. Double hah hah hah. If you’re an investor, it’s about them making bets with your money and if they lose you lose, if they win you get a few scraps and they get a bigger vacation home.
This really should not be surprising. There is apparently no social or ethical force that will cause people to bypass a chance to shovel money into their own pockets, without regard for catastrophic costs to their fellow-humans no matter how predictable. This needs to be an axiom in the thinking of all future regulatory planners.
Lesson 2 · Of all the failures that led to the big meltdown, the most aggravating is the failure of the bond-rating agencies. These people took good money for pasting AAA credit ratings on piles of the most implausible shit imaginable, and what’s irritating isn’t that they did it, it’s that apparently they didn’t break any laws and thus there’s little prospect of the long prison terms that anything smelling of natural justice would require.
If you shared my blank, astonished “how could that happen?” reaction, you’ll probably enjoy Roger Lowenstein’s Triple-A Failure, published in April 2008 in the New York Times.
Once again, not surprising: having debt ratings paid for by the people issuing debt creates a huge conflict of interest, and per Lesson 1, any such conflicts will be taken advantage of by Finance insiders to fleece the sheep otherwise known as you and me.
Lesson 3 · Finance’s relationship to the economy should best be considered by policymakers as that of a dangerous parasite to its host. Any benefits offered at the margin by its market-making functions are dwarfed by the existential threats it is empirically observed to pose, on a regular basis, to the proper functioning of the real economy.
An earlier draft had the word “real” in the previous sentence enclosed in quotes. I took them away, because it really is real, as opposed to Finance which, on the evidence, is the mostly-toxic product of pure imagination, imagination fevered by a lethal illness that the rest of us are in danger of catching.
I’d say Finance should be regulated into utility status all over the civilized world, and if the community of hard-core financial engineers really wants to go on being a collective pathogen, they’ll be forced to acknowledge that what they do just isn’t civilized behavior, and do it somewhere else. We’ll be way better off without them among us.