RSS Feed MenuAll around us we see the losers and victims of the crash of 2008: the foreclosed homeowners, the unemployed managers making a substitute office out of a Starbucks table. It was Michael Lewis’ brilliant idea to study winners: investors who shorted the housing market when the shorting was good. He made a brilliant book out of his idea too, as you likely don’t need me to tell you: The Big Short perched for many weeks atop the bestseller lists, and deservedly so.
The book is everything you’d expect from Lewis: vivid, funny, smart and ironic. His characters are fascinating oddballs: three recent college graduates betting their own dollars and pleading with Wall Street banks to disregard their unimpressive sublet premises atop Julian Schnabel’s studio in Greenwich Village; a hedge fund manager who dropped out of medical school because he discovered he didn’t actually care about helping people; a stock picker so disgusted by what he learns of the subprime mortgage market that he ends up a supporter of ACORN and other radical causes.
But here’s the thing you might not expect. At the end of his book, the winners have won tens of millions, even hundreds of millions of dollars. Yet they don’t feel like winners. The years of being on the receiving end of Wall Street’s scorn and disregard were not smoothed by their moment of triumph – in part because in every case, the major institutions they bet against were able to mobilize government to save themselves, even reward themselves. The book’s fools and villains end up making very nearly as much money as the book’s unlikely heroes. Wall Street’s self-infatuated “smart money” went long on subprime America. For a brief moment, it looked as if the “smart money” would suffer the fate of “dumb money” – but no … the so-called smart money proved to be genuinely “smart money” after all, thanks to its canny investments in political influence. It is the US Treasury that becomes the ultimate “dumb money,” absorbing Wall Street’s losses because the very scale of the Wall Street disaster denied the Treasury any other choice. Meanwhile those who went short still feel themselves ignored and disrespected, voices in the wilderness – albeit now a 5-star wilderness. Like millions of Americans who did not fare so well, they remain angry.
Yet as we approach the 2-year anniversary of the failure of Lehman Brothers, it amazes me how harmless and ineffectual all that anger has proven. In the fall of 2008, my banker friends expected a surge of punitive populism. When the public discovered the abusive practices of the banks, there would be hell to pay!
By and large – that has not happened. Some bankers were subjected to some harsh questioning at televised committee hearings. Congress has enacted a financial reform bill that locks some of the barn doors through which the horses escaped. Otherwise? Pffft.
The visible public anger we see and hear has been skillfully redirected toward government, and especially to the president who inherited the mess.
Make no mistake: that president deserves much blame for his weak response to the crisis. David Brooks is absolutely right: President Obama abdicated to Democrats in Congress and allowed them to use the recession crisis to enact pet spending projects in the name of “stimulus.” Obama deferred when the country most needed him to lead.
On the other hand when conservatives describe the crash as a government failure, not a market failure, they issue a dangerous formulation. If true, it begs the question: so who was running the government when the failure occurred? Conservatives and Republicans will answer: Don’t blame us! Blame the Community Reinvestment Act, plus Fannie Mae and Freddie Mac. The Bush administration asked Congress to do something about Fannie and Freddie back in 2005, Congress declined, so the ensuing calamity is not our fault. But that’s excuse-making. The administration positively welcomed the housing bubble.
Here for example is Karl Rove, speaking at the American Enterprise Institute in May 2006, defending the administration’s economic record:
Mortgage interest rates remain near historic lows. And homeownership remains near a record high, with sales of new and existing homes reaching record levels in 2005.
Real disposable income has risen almost 14 percent since President Bush took office. The Dow Jones industrial average is near its all-time high. And since the 2003 tax cuts have been passed, asset values, including homes and stocks, have grown by $13 trillion.
Without the housing claim, it would have been hard to depict the Bush economic record as very much of a success. Employment was up, the Dow was up, but median incomes still lagged behind 2000 levels. It was the rise in home prices that represented the administration’s main argument that its economic policies had helped the American middle class. No way was the administration going to act to slow – let alone halt – that rise. To the extent that political appointees regulated the lending industry, the political appointees understood what was expected of them and did not interfere.
I don’t raise this point to cast aspersions, but to inspire thought as to how Republicans can deliver better results next time. Republicans talk budgetary policy (that’s why Paul Ryan has become a heart-throb of the party). They need to think about economic policy. The measure of success is not shrinking the deficit – that’s just a means to an end – but raising incomes. We need an open discussion about why our policies failed to deliver that result in the 2000s as a preliminary to doing better after 2012 or 2016. The Big Short is not a book on that subject. But at least it helps to clear away some of the errors that prevent clear and creative thinking – aside from just being a damn fine book in its own right.
ktward // Sep 6, 2010 at 6:00 pm
Without thinking twice, I bought Lewis’s book because he’s a thoroughly engaging writer. I read Blind Side, loved it. I never miss his Vanity Fair pieces.
Yet, The Big Short remains unread at the bottom of my topple-ready bedside pile.
Mostly because I positively hate the topics of finance & economics and can only suffer them in short, controlled bursts. (I hate finance but read Lewis in the same way that I hate sports but [used to] read Rick Reilly’s back page SI column– before he defected to something called ESPN.)
Frum: At the end of [Lewis's] book, the winners … don’t feel like winners. The years of being on the receiving end of Wall Street’s scorn and disregard were not smoothed by their moment of triumph … those who went short still feel themselves ignored and disrespected, voices in the wilderness … Like millions of Americans who did not fare so well, they remain angry.
Frum’s characterization is spot on, and I’m reminded of what Lewis himself had to say about these dudes that smacked me square in the forehead. In an interview with Terry Gross, (emphasis mine):
http://www.npr.org/templates/transcript/transcript.php?storyId=124690424
GROSS: Did you come to see the people who bet against the financial system as vultures or as just really, really the smartest guys around or some of both? Because a lot of people see short sellers as vultures, people who want to feed off of the death of something – the death of a bond, the death of a company, the death of the financial system.
LEWIS: I didnt see them as vultures. I didnt have a view going into the story about who they were or why theyd done what theyd done. I was surprised that for the most part, they weren’t what you think of as short sellers. They didnt have funds, the whole point of which was to short things. They were by nature and experience, ordinary stock market investors, that they were looking for stocks to bet on and the facts made it very difficult for them to do that. … [T]he world forced them into this position in a way …
Having said that, there’s then the question of, to what extent do they contribute to this problem, to this crisis? And in their defense to start with, one of the things they tried to do was tell the world what was going on when it was going on and no one would listen.
GROSS: All of them tried to do that? All the people you write about?
LEWIS: They were all extremely noisy. They had various ways of being noisy. But Jamie Mai and Charlie Ledley went to the SEC and tried to get the SEC to investigate the ratings agencies and the Wall Street firms that were creating subprime mortgage bonds and so on and so forth, and the SEC didnt want to have anything to do with them.
Michael Berry was writing very persuasive letters that were widely circulated in the investment community about the madness of subprime mortgage lending well before he started shorting subprime mortgage bonds.
Steve Eisman, the third main character in the book, ran around Wall Street being rude to as many people as possible who were involved in the business, telling them that they were going to blow up their firms and nobody would listen to him. So they ended up being ineffective messengers but they tried.
If everybody had thought the way they thought and behaved the way they behaved, the crisis never would’ve happened.
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llbroo49 is no doubt quite right in opining that most people won’t have anything to do with a blog piece of this topical nature. Hell, I’m breaking out in a rash already.
But we citizen schmoes have a right to spend our time earning a living, raising our families and contributing to our communities. Keeping relatively well-informed is a responsibility, yes, but it is not incumbent upon us to possess expertise in areas that require considerable time and education to even remotely understand. Assuming we can even grasp the conceptual nuances.
That’s one of the reasons why we pay taxes.
There’s an expectation that our taxes fund gov’t appointed Regulators (e.g. the SEC) and elected Committeed Legislators (e.g. House Financial Services) who are are not only demonstrably capable and topically well-advised, but who also take their professional and ethical mandates seriously.
Ineffectual government oversight did not cause this economic tsunami.
But neither did it mitigate the catastrophe, and it willingly turned a blind eye to Wall Street’s Little Shop of Derivative Horrors. (Nothing short of a lobotomy is ever going to free me of the image of Greenspan’s creepy wrinkled ‘I made a mistake…’ face, and the ugly reality revealed by such a statement from him, of all people.)
Knowing what we know, on this issue I am profoundly disappointed with Obama — his tepid leadership, several of his key econ admin choices — and the Dem-led Hill’s legislative response. That Obama might nominate Warren as CFP Director is inarguably a step in the right direction, perhaps doubling as an overdue bone to throw to his base.
But ultimately, I fear that Obama has squandered an altogether rare opportunity to effect extraordinary regulatory reform where it is so direly needed– ‘rare’, in that this kind of opportunity reveals itself only through painful fire. (As Rahm himself wisely pointed out, ‘Never let a serious crisis go to waste.’ Yet, they did.)
Adding insult to injury, today’s GOP is primed to assert a majority power that is more clueless and unprepared to lead than ever.
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