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The Big Short:Inside the Doomsday Machine

by Michael Lewis

I purchased this book shortly after a conversation with one of my siblings, in which they bought up the question of the culpability of the rating agencies in the 2008 financial crisis. This was an aspect I hadn't previously considered, and I felt I ought to get more informed about one of the defining moments of the new century.

Years ago, I read Mr Lewis' "Liar's Poker", an expose on the crazy world of 1980s finance. Mr Lewis said that, when writing it, he thought he as documenting the end of the 80s, but of course, the 80s didn't end. The 80s still haven't ended, but their death-knell may have been rung in 2008, when the western financial miracle run by 'masters of the universe' was exposed as a giant Ponzi scheme run by crooks and morons. Mr Lewis' latest book, 'The Big Short' narrates the events that led to the collapse of the world's financial system, as seen through the eyes of the people who were betting against it, 'shorting' the market.

It's a gripping read, one of a number of non-fiction works I've read recently that frankly are more exciting and have better 'narrative pull' than much of the fiction that I come across these days. If this book has a failing, (apart from the frankly odd Penguin UK cover) it's perhaps that it's just a little lacking in details of what a Collateralized Debt Obligation or a Credit Default Swap, really is. It must be tough to get the balance right between drama and technical detail in a story where the white-knuckle action consists of watching numbers and charts on Bloomberg terminals roll over and plunge into a death spiral. 'The Big Short' is one of those non-fiction works where much of the drama is seen through the eyes of the players in the game. Even if you don't understand the topic, you feel the alarm or excitement they feel. Mr Lewis finds dramatic scenes that are essentially storyboards for Hollywood, for instance the one near the end, where one of the mavericks who shorted the market is finally given a platform to speak, where he predicts the collapse of the financial system, while, unknown to him, his audience are watching that prediction come true in real time on their blackberry smartphones.

Focusing on those who were shorting the market, those who were shouting 'No!' when everyone else was shouting 'Yes!' is an inspired choice. Focusing on the underdog always is. One has to keep reminding oneself that these people, or most of them, are at the end of the day just out to make money. The book tries, from time to time, to make the case that these people were shorting the market as an expression of moral outrage, and perhaps it's true, but the simplest explanation is that they were just trying to get rich. Still, you've got to respect their determination not to be cowed by peer pressure, and to see and speak the truth, no matter how unpopular it is. Such people are very rare in this world.

And this story illustrates very well that being right is essentially worthless. People do not respect or value 'The Truth', people only respect and value money. Maverick fund manager Michael Burry suffers constant abuse from fickle investors, and even when the market turns, and he's proved right, and is making them a fortune, not one of them apologises or admits he was right, or even say 'thank you': some of them even continue screaming at him as they pocket the money he's making for them. It's dangerous to be right when the majority are wrong, and it would seem that the only use to put a genuine insight to, is in making money. Even after you've been proved right, people will deny it, and always have a clever excuse, but when you can rub their faces in the fortune you've made off betting against them, that's a win that they can't take away from you.

This book documents more than a financial crisis: it documents a Ragnarok of false idols. The highly paid 'best of the best' are exposed as idiots who didn't even understand the business they were engaged in, and just about everyone involved is shown to be a walking, talking moral vacuum. So long as they got their fat bonuses, no-one really cared what the consequences were, no-one wanted to know and no-one wanted to think beyond their immediate self interest. Those who had some idea what was going on thought they were screwing everyone else, but rather satisfyingly these Financial Frankensteins had built a monster so complex that it's consequences fed right back to them: they were screwing themselves. 'The Big Short' is a study in the way that complex systems distance people from the results of their actions and make the unthinkable doable, of how institutions shape people to their own requirements, and of how herd behavior is the norm for the human race even if the herd is charging towards a cliff. People are always prepared to buy into a false promise if the hoped-for payoff is big enough. Once again we see that the idea of 'economic man', of rational actors rationally making rational choices in an efficient market, is bullshit. When the financial order collapsed in 2008, a lot of other things collapsed with it. The idea that humans are rational creatures who can build a better world through the application of science, that there's experts running the show who know what they're doing, and that the future is ever more prosperity bought to us by free markets and democracy, has been exposed as fantasy. Don't get me wrong, I like free markets and democracy, when they're applied wisely. But anything can be a weapon and an instrument of evil in the wrong hands, for "Out of the crooked timber of humanity no straight thing was ever made". The twentieth century saw the collapse of one of the two great post-enlightenment contenders: communism. It seems likely that the other is going to collapse in the twenty-first, leaving us in an ideological vacuum that will be filled by tribalism, religious extremism, and various shades of fascist dogma. Whether we're dealing in tulips or CDOs, whether the players are financial institutions, religions, or political ideologies, one cannot understand humanity without confronting the madness of crowds.