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The Big Short: Inside the Doomsday Machine, by Michael Lewis Review by Peter Mosier

You don’t have to spend too much on time online before you run into conspiracy theorists who claim dubious forces are manipulating the world’s financial systems. They say the system is unfairly set up to make it impossible for the average person to be successful. Believers in this conspiracy would do well to remember the adage known as Hanlon’s razor: never attribute to malice that which is adequately explained by stupidity. It is the stupidity in the financial system that is documented in Michael Lewis’s The Big Short.

Not surprisingly, researching financial conspiracy claims very quickly shows that they completely lack evidence. No, the Illuminati is not controlling the international purse strings. Neither are the grey aliens nor the Vatican. Unfortunately, the absence of deliberately malicious high-level conspiracy does not automatically demonstrate that the financial markets are safe and fair. The Big Short demonstrates a different type of conspiracy — that which results when large groups of humans, motivated by greed and fear, work together within a broken system with flawed assumptions.

The narrative presented in The Big Short demonstrates the steps that led to the collapse of the financial markets in 2007 and 2008. Along the way it demonstrates the underlying root cause of the collapse was money managers receiving incentives to take high-risk bets without the usual risk of consequences that normally accompany such bets. Furthermore, the problem was not localized to one firm, but was — indeed, is — endemic to the financial industry. The various financial ratings firms were paid to rate the risk of complicated financial derivatives that they evidently did not understand and for which they had an incentive to rate positively. As long as the mortgage housing bubble continued, and as long as the financial instruments were rated positively, the investment firms made large amounts of money and the ratings agencies made money for the service of rating those investments.

Lewis tells the story of a handful of contrarian speculators who were skeptical of the system and who recognized it was unsustainable. In the end these financial skeptics were betting not only against a particular investment, but indeed against the entire U.S. economy. Spoiler alert: the bubble burst, the economy collapsed, and the world was thrown into financial crisis. But the skeptical investors who had recognized the weakness in the market and had bet against it struck it rich, making millions upon millions of dollars.

Sometimes it pays to be the skeptic.

2 responses to “The Big Short: Inside the Doomsday Machine, by Michael Lewis Review by Peter Mosier”

  1. Bruce Graham says:

    If I may quote Eros from the movie Plan 9 From Outer Space.” You see? You see? Your stupid minds! STUPID! STUPID!

  2. Deke says:

    As usual, your summary of the financial crisis tells only half the story. An equal cause of the financial meltdown was the greed of housing speculators and homeowners who decided to live beyond their means by using their houses as piggy banks.

    Lewis’s book is s fun read, but it is not a particularly insightful about the causes of the crash. In focusing on a handful of contrarian investors, it look at the crisis through a keyhole. As many have noted, the notion that there was going to be a financial collapse was hardly restricted to a few skeptics. Goldman Sachs was buy insurance on its CDO’s a year before the big meltdown. For a real history lesson, there are many better books, such as “All The Devils are Here.”

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