Archive for June 2nd, 2010

Inside the Financial Crisis

Although I have numerous ideas for posts from the travel course to Austria and Germany, I’m going to start with a book I read on the train, recommended to me by my chiropractor: The Big Short by Michael Lewis.  I’ve been intrigued by how people couldn’t see this crisis coming when the signs were clear and obvious.   When I mentioned that to Dr. Roberts, he recommended this book which I took with me and read on the train between cities.  This will be a short post — a recommendation to go and read this book.

The book itself is a good read for anyone, regardless of ones’ level of understanding in the fields of economics and finance.   It also goes beyond just the “big bad banks” (though they clearly behaved badly) and the usual blaming of de-regulation, to paint a clear story of why de-regulation and the nature of financial markets led to such a collapse.  The story was told not so much through technical explanations of how the system worked/failed, but through psychological insight into the players — in particular the players who managed to figure out that the system was doomed to collapse.   Not only did they see clearly what so many did not, but they were ignored and even ridiculed.    These stories illustrate just why the market doesn’t work like magic, and illustrate the problems inherent with any concentration of wealth and power.

Most important is psychology.   Anyone can put forth a theory, but Lewis lets the characters involved tell the story.  It can be the CEOs  or investors who are utterly clueless to what they’re dealing with, but believe because they’re making millions it will go on forever.     Both the people who refused to see the obvious, and those who feared for democracy because of how insane the mortgage markets and their derivative securities operated, show the limits of rational thought.   Humans are driven less by rationality than by other psychological quirks and a dose of wishful thinking alongside ignorance.

What to do about all this is another question.  Lewis shows us a bit of how  we got to where we are, and that it’s not a plot of evil capitalists or a conspiracy theory — though greed, conspiracies and amorality are present.  Rather, we as humans have faults, quirks, and weaknesses.   Yet we also can have honor, intelligence, and ideals.    No theory or philosophy can explain or guide human behavior, but perhaps we can at least learn from our mistakes.

Anyway, this is a short post, but the point is that if you are interested and want to understand what’s happening to the US and world economy, want a riveting and well told story that is interesting in its own right, and want to be provoked to reflect on the human condition at this time in history, read The Big Short by Michael Lewis.

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