So I'm not expert in finance and the business of Wall Street. I already knew that, but it wasn't until I had almost finished the complicated and convoluted story that Michael Lewis covers in the Big short that I finally got the title. This is not to say that it isn't a great book, it really is. it's simply to say that the world of finance has its own language, pace of events and opaqueness.
In fact this opaqueness ifs a main part of the story in The Big Short. I won't ruin it for those who haven't read it, but the essential story is about a group of characters , who discover the rot at the heart of the subprime mortgage crisis in the U.S. and decide to short the market. End result, they were right, even though nobody believed them. Everyone else was wrong. But the one point that comes out strongly in the afterword, is that essentially both sides of the bet got rich. No one who was truly responsible for destroying large chunks of the real economy through their fancy manipulation has been held accountable.
For anyone who believes that it was the borrowers who were the problem, I suggest you read this book, and think again. It's hard to even come up with words to describe how crazy the whole thing is, and the lack of due diligence done on the part of the banks. One of the characters at the centre of Lewis' story calls the subprime market the doomsday machine.
What's the saying? ," if I owe you thousands of dollars, good for you, but if I owe you millions, watch out". Something along those lines. I honestly don't know how people could imagine that lending over 700K to someone who makes $12,000 a year is good for anyone. I find it unbelievable that people could overlook the fact that even if they can pay the "teaser" rate for two years, that the real crisis will hit when interest rates reset. This insight is in part what allowed these traders to bet against the market, basically to bet that all hell would break loose and they were right.
What Lewis is so good at achieving is the unbelievable nature of what happens to all parties. Even those betting against the market, can't believe that it is being allowed to happen, that no-one else sees the disaster coming, and that so many people are on the wrong side of the bet.
I was listening to a podcast of Planet Money which jokes about having 4th graders read contracts, to see how much they understand. What was amazing was that someone had taken the effort to redesign a privacy notice into simple language that even these kids could understand. It was amazing how much they were able to understand when it was presented clearly. I'm a big fan of the new rules on credit cards we have here in Canada which force companies to post how long it would take to pay off the bill if you only paid the minimum. One recent bill said 17 years!
I read the book Nudge by Cass Sunstein (recent profile in the NYtimes here and Richard Thaler during graduate school and I did find some elements of it really interesting. What I like about this approach is that it is very practical. The approach examines a problem and says, are there ways in which we can encourage people to behave in a way that's in their interest. There is a section that talks about how to make people understand the complicated contracts that are part of modern day life, such as cell phones. Providing examples to people of how things will affect them, make a lot of sense. Building this into regulation is actually a way of encouraging market forces and ensuring they work better.
The credit card example demonstrates the power of information as a policy instrument, which is often overlooked, but in the right situation can be a powerful and relatively cheap way of achieving real results. I think this is one thing that the open data people have right. Information can be powerful.
NB: I'm going to attempt to post twice a week as of today, *fingers crossed*
I think this is a good post. At the time, nobody really paid much attention to what was going on in the mortgage/housing market. Everybody was making money, spending money, etc, that only a few people were trying to understand the extent to which the problem was spreading.
ReplyDeleteI would take exception to one aspect of your argument thought. While I don't put all the blame on them, borrowers (i.e. consumers) as a group share some of the blame in this. While financiers and bankers actively promoted their rotten products, they did so to a willing and demanding group of consumers who wanted, needed, begged to have the extra credit to continue living their credit-filled lives. To diminish - or outright deny - that borrowers played a role - perhaps not a starring role but certainly a supporting role - in the bubble-build-up is to completely ignore the "demand" aspect of supply-and-demand economics for financial products. Many people try to give a pass to the borrowing public but, after all, if it wasn't, in part, the demand they created, there would be no need for all the crazy credit derivatives.
At the end of the day, what we witnessed in the US was a society gone crazy - government regulars, bankers, mortgage brokers, consumers/borrowers, etc.