The Big Short: Inside the Doomsday Machine by Michael Lewis
How a few smart weirdos actually made money in the last five years
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FOR ALL OF ITS ENGAGING STORIES, excellent journalism and unbelievable real life events, the most important section of “The Big Short” comes on page 14, when a financial analyst studying subprime mortgage data before the crash has a revelation about what he is seeing:
“It was as if the ordinary rules of finance had been suspended in response to a social problem. A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.”
For my money, this is Patient Zero of the financial crisis. To be sure, greed and fraud and poor oversight from both government and financial institutions played a key role. But if you want to talk about how Wall Street managed to establish its dumbass ideas as a pillar of our nation’s economy, find out where it received buy-in from the American people. And not just poor Americans, but everyday American families.
Once upon a time a family could get by on a single income, until, gradually, two incomes became necessary to sustain a middle class existence. By the turn of the 21st century, a lot of two-income families, whose incomes were not rising, needed some way to generate more money to keep up with the costs of paying for health insurance and/or sending the kids to college. Those families could add a third income — which despite its quaint, child labor Industrial Revolution era charm, never really caught on (though there’s still hope!). Or they could take out a loan on the one financial asset whose value had kept up with everything else: their home. Historically low interest rates made it easier to swallow, and we went on thinking all was well, until it wasn’t.
These few lines from page 14 are also important because they are, for the most part, the only glimpse Lewis provides of the saddest stories in all this: the people who were left with nothing but damaged collateral when the market fell out, and to this day have received less relief than is good for them or our country. “The Big Short” is, in fact, the opposite story. Over the course of the book, Lewis follows a handful of eccentrics who managed to make money betting against the system. The approach is risky since, well, just imagine the pitch meeting: