26 Dec Panic: The Story of Modern Financial Insanity by Michael Lewis
I want as badly as the next guy to find someone to blame for the economic mess we find ourselves in. I have spent more hours this year studying the present economic malaise than you would believe if I told you, and I am sad to report that any attempt to narrow the blame game down to one politician, or one Wall Street firm, or even to one general category, is not only too simplistic, it is stupid. Many of us are excited to say goodbye to 2008, and I do believe 2009 holds much more promise, but it is fundamentally false to assume that 2008’s problems and causes are essentially new. And it is even more false to think that certain elites are at the root of it. Sadly, like the author of Ecclesiastes said, “there is nothing new under the sun.” And this year’s mess, like nearly every mess we have seen in modern economic history, was caused by a familiar cast of characters: greed, irresponsible speculation, and irrational panic.
I finished reading, Panic: The Story of Modern Financial Insanity, today. Michael Lewis’s 370-page gem is what readers of Lewis have come to expect: a book that is hard to put down. But unlike his Liar’s Poker and Moneyball, Lewis did not pen this entire book himself (though his several contributions to the book are among its very best). What he has done, though, is collect an extraordinary set of articles written at the crash of 1987 (Black Monday), again at the collapse of 1998 (Long Term Capital Management’s implosion, combined with the Russian default crisis), again after the dotcom meltdown several years ago, and now again this last year after the subprime fallout. Anyone who can read this history, and understand the context for these four periods, and fail to grasp the continuity of this story with history, is willfully ignoring the facts. Asset bubbles are older than most modern amenities we take for granted (electricity, automobiles, etc.). Similarly, the popping of said bubbles has been around for centuries. Bubbles are caused by reckless speculation on the front end, and they finish in excessive panic at the back end. But no bubble in human history was solely created by the Fed, or Washington D.C., or Wall Street, or the media, or your favorite bartender. Bubbles are a collaborative effort, requiring a great deal of accomplices, all of which generally suffer from the fallout (some more than others), and all of which share the blame.
The causes of this latest bubble and the credit shock it has created can be explored for another generation; it still is not going to stop another one from taking place down the line. At their root, human beings are at least capable of being incredibly greedy, incredibly short-sighted, and most damning, incredibly stupid. The hangover from the dotcom meltdown (a meltdown, I might add, that destroyed far more paper wealth than 2008 did) was not even put back in the bottle before the real estate brain failure of the 2000’s began. I was simply in awe at reading Michael Lewis’s description of the aftermath to the dotcom problems, blown away that he was describing a different epidemic than the one we live in now:
“The whole of the [media] machinery is designed to facilitate this simple inversion: the culprits of the 1990’s, the reckless speculators, are being recast as the victims. What they are actually doing is warping the immediate past and preserving investors’ dignity along with their capacity to behave madly with their money the next time the opportunity presents itself. – Michael Lewis, New York Times Magazine, October 27, 2002
I would only need to edit a couple minor words to utter an equally astute observation about the aftermath of the present crisis. We have made the culprits the victims, and it is incredible to watch. I feel no need to vindicate the short-sighted fools on Wall Street who leveraged mortgage securities to the hilt, and I certainly can not bear to say anything kind about a Washington D.C. policy that forced a social achievement on society (home ownership) that much of it was nowhere near ready for economically. But the reality is this: speculation caused this mess, and it will cause the next one. Risk-taking is as part of American society as apple pie, and it should be. But reckless speculation is a parasite, and it is at the scene of the crime every time we experience a market meltdown. Maybe someday we will get serious about preventing the next one, and actually demonize the real culprits in a problem, instead of giving them a hall pass to do it again. But in the meantime, there is nothing new under the sun, and I, for one, am at least grateful to Michael Lewis for his fine work in documenting that financial insanity seems to be cyclical.
Lewis writes, “The cycles of euphoria and panic have become more and more thrilling: whoever has been seeking to minimize drama in the financial markets has been doing a poor job of it. Step back from it and you can’t help but wonder if anyone is really trying. If perhaps this is the nature of global capitalism – ever more complex, ever more opaque, ever faster booms and busts – and it’s not the markets that need to change but our reaction to them. How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”
Amen. And next time it happens it will be déjà vu all over again.