Michael Lewis Takes Us Face to Face with the Investors Who Cashed in on the Financial Collapse
In The Big Short: Inside the Doomsday Machine, Michael Lewis adds to his impressive collection of beautifully written books with a fascinating tale about professional investors who foresaw the financial debacle - and profited from it. In presenting a quirky array of smart, self-serving characters, Lewis intends to help fans of his storytelling understand what went wrong with American capitalism in the early 21st century.
The stars of The Big Short, whom Lewis describes with meticulous detail, definitely see beyond the curve and around the bend. Contrarians, they bet against the real estate market and the very companies that the U.S. government so expensively bailed out in 2008 and 2009. They even wonder aloud about whether the pillars of American finance committed crimes as well as technical errors and moral outrages by peddling financial instruments -- designed to "hide the risk by complicating it," Lewis smartly says -- that seem destined, sooner or later, to fail miserably.
"That's fraud," one of Lewis' heroes exclaims after divining the flaws in a particularly abusive investment vehicle. But rather than call the police, regulators or the media, this shrewd investor benefits from what he describes as "a stunning opportunity." None of the other investors chronicled by Lewis blow the whistle to authorities either, behaving instead like bystanders in a crowded theater who, when fire erupts, sell extinguishers to people who unexpectedly find themselves ablaze.
The moral blindness of the characters in The Big Short never becomes a subject of rumination for Lewis, who is content to see Wall Street's crackup as a kind of Greek tragedy. Talented individuals pursue narrow self-interest and collectively create forces that unleash a whirlwind of trouble for total strangers. Lewis even gives space for his short-sellers to crow about their own perspicacity. In his clever depictions of their lives, moreover, he neglects the obvious task of identifying the deeper causes underlying the mayhem.
Joseph Stiglitz, a Nobel Prize-winning economist, is not so shy. In Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz essentially writes, "I told you so" over and over again. He presents a familiar set of villains, notably former Federal Reserve Chairman Alan Greenspan, guilty of flooding the country with cheap money and permitting banks to do anything they wanted. President Obama comes in for harsh criticism for simply continuing his predecessor's bank bailout. He even accuses Obama of a "whitewash" of big banks whose failures were tragically rewarded by the president's belief that they were "too big to fail."
Stiglitz disagrees. Instead of giving more piles of free money to wounded giants, Washington could have seized the sickest behemoths, such as Bank of America and Citibank, and either run them as government trusts or sold them off in pieces. Other countries have done so, he points out. In a stinging indictment of the government's response under both George W. Bush and Obama, he concludes: "The U.S. taxpayer put out hundreds of billions of dollars and didn't even get the right to know what the money was being spent on." The result was awful: "U.S. banks carried on paying out dividends and bonuses and didn't even pretend to resume lending."
Six months ago, Stiglitz's boldest ideas might have been easily dismissed as too radical. But today, with joblessness stubbornly high and the economy stagnating, the financial crisis is clearly not over. A new wave of foreclosures and sinking real estate prices call into question rosy forecasts of newfound stability.
While he allows that the "free fall" of the U.S. economy has ended, Stiglitz expects long-term declines in American living standards, for instance, and thinks that the government must borrow even more heavily to support current consumption and investment in infrastructure.
The obvious question is if Stiglitz is so smart, why isn't Obama listening to this guy? The main reason is that the president's leading economic advisers, notably Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, engineered the tragically flawed financial bailout. From reading Stiglitz, these Obama buddies appear to be the equivalent of war criminals who, in a more just world, would be awaiting trial and imprisonment.
Only by pressing the presidential restart button might Obama get a handle on the nation's economic woes, starting with the reinvention of financial regulation. Unlikely. Since Wall Street seems to own both the Democratic and Republican parties, the chance for any reforms seems slim to none, at least under the current president and Congress.
The dismal state of affairs brings us back to Lewis, whose chronicle of how a few people profited from the misery of many highlights the basic unfairness of life in an America where justice is mocked by both private greed and public glory. Even as Obama carries on about hope and making America great again, the hard evidence suggests that winners cheat and cheaters win in the land of free. How else to explain a situation where the people who caused the crackup, and have failed repeatedly to fix it, still have their hands on the steering wheel of the American economy? Even worse, Lewis dourly concludes, "those same financiers (are) using the government to enrich themselves."