The Big Short & Another Big Crisis

 I read the book The Big Short, a few years back, by Michael Lewis. It explains why, as the money manager known for shorting securitized subprime home mortgages, Steve Eisman, put it in Aug 2008, "If the entire US financial system seems like a circular Ponzi scheme, that's because it is."  In other words, when CEO of Goldman Sachs, Lord Blankfein, says “the system is extremely complex,” he means if he explains how it works, people would realize the whole thing was set up by guys like Bernie Madoff.

To understand how our financial systems actually work - and indeed continue to work even today - I highly recommend reading the last chapter of Lewis's book, Chapter 10, and especially the Epilogue. One of the main characters in the book is Michael Burry, a trader who saw the approaching collapse long before anyone else, and who was scorned by others for his having such foresight.

In an interview about the movie based on the book Burry warns that “another crisis is coming.” See http://nymag.com/daily/intelligencer/2015/12/big-short-genius-says-another-crisis-is-coming.html?mid=full-rss-krang,dailyintel,scienceofus .   

Of course "another crisis is coming." That's because our current political and financial systems all but preclude any other option. And although Burry is right about "another crises is coming," he seems to continually contradict himself on whether we should blame someone, and if so, who. For example, first he says he is "shocked that executives at some of the worst lenders were not punished for what they did," and then he says that the problem "starts not with the bank, but with decisions by individuals to borrow to finance a better life."

Then, after preaching about how we should not be "doubling down on blaming others" and how "We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame," Burry goes on to blame both Frank Dodd and Barney Frank by saying they are "two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis." What's more, Burry even subtly blames the "crimes of companies" that banks were "forced to acquire."

Well, which one is it Mr. Burry: should we blame no one but ourselves, or should we blame the "lenders.. who were not punished for what they did," or Dodd & Frank, or the "crimes of the companies that banks "were forced to acquire," or simply those "individuals" who borrowed to "finance a better life"? He then goes on and blames the individual borrowers indirectly by referring to everyone else on his list as simply "enablers."

But given the fact that America's economy has been running largely on credit fumes since roughly the 1970s - thanks to three decades of wage stagnation even as the cost of housing and higher education, and almost everything else, over that same period have exploded (it's no coincidence, after all, that national and personal debt have been rising in tandem with private profits) - such 'borrowing' has become an increasingly necessary part of middle class survival. Our economy, in other words, requires that everyone from Main Street to Wall street necessarily "borrow to finance a better life," or risk being left behind. For many people, much like businesses and banks the world over, not borrowing is simply not an option. After all, can you think of any major purchases you've made over your life that you did not need to borrow money for? Well, me neither. And how many people in the middle class can really survive these days without at least one credit card?

In fact, Burry seems to ignore the fact that both individuals and financial institutions all ran into the very same brick wall, and for the very same reason: they all borrowed excessively - from AIG over leveraging by over $5 billion and Lehman Brothers by over $70 billion - under an "irrational exuberance" (to borrow a phrase from Alan Greenspan) that the housing market would only continue to rise. And when it didn't, everyone blamed "personal responsibility," unless you are a financial institution, of course. 

"No single snow flake ever felt responsible for an avalanche," however, but large implosions of the financial markets create much worse. Hence, when the largest institutions began to implode because they had over leveraged themselves with speculative investments, from sub-prime mortgages to credit-default swaps, they all blamed the "individual" for taking on more debt than he/she could pay back. That AIG and other financial institutions had done the exact same over leveraging, and on a far greater scale, is apparently irrelevant to Mr. Burry.

This kind of double standard is essentially what St Augustine described in The City of God as the idea that Emperors are applauded for doing with an armada what pirates are executed for doing with a single ship. If you are not destroying things on the level of a God, you are the devil.     

Burry even points out such a double standard when he says that the "worst lenders were not punished for what they did" because "this is the nature of these things." Hence, while such institutions may enjoy being legal persons, according to Burry, we should not expect those legal persons to take "personal responsibility," apparently. Glen Greenwald's book, "Liberty and Justice for Some," discusses in great detail how this "legal inequality" - where average citizens are forced to take "personal responsibility" for causing the collapse by irresponsibly trying to "finance a better life," even as "the biggest banks got bigger" and "the ones running the machine," as Burry puts it, "still live in mansions" - is simply par for the course. We even see this legal inequality in Burry's own comment that "the little guy" needs to be "more diligent and ... more suspicious" than those mansion-dwelling "enablers" who run around "offering free money" (many of whom are apparently the same guys Burry is "shocked" were not 'punished for what they did" in the first place).

Personally, I see this as no different than those who condemn Pol Pot and Stalin for being monsters for killing millions, while praising God for ordering his "chosen people" to repeatedly commit genocides in the O.T. or even for killing everyone and everything on the planet via the flood. The only way to demonstrate supreme power, in other words, is by breaking all the rules and then getting away with it. In many respects, as Greenwald points out extensively, such a double standard is how everything seems to works, whether it's God, governments, or those institutions that are "too big to fail." And if Greenwald had read Augustine, he shouldn't be surprised.

Also, Burry's comparison of the Dot Com bust is an apple to the orange of financial collapse.  All those "VCs and dot-com executives" bought their mansions with money from the financial institutions that invested in them. The only similarity is that both were financed by the same "lenders," which only proves how right Michael Lewis was in his book, The Big Short, about these guys being little more than "crooks and fools."   That's why its hard for me to take Burry seriously here, because even as he says we shouldn't be playing the blame game, all he is doing is blaming individual borrowers for over leveraging themselves and the government for mucking up the processes by which banks can make loans, good ones and bad ones. For example, he states:

- Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire.

As we know only too well, this happens to be true. But then Burry says

--Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done

.

This is somewhat true, but it is also mostly false and, in my opinion, pure grand standing. Martin Wolf, who is "widely considered to be one of the world's most influential writers on economics," is the associate editor and chief economics commentator at the Financial Times. According to Wolf and others, for example, the chief cause of "the hollowing-out of middle America," and indeed the economy overall, is actually a result of the financialization of the economy, along with the subsequent deregulation that precipitated the collapse in 2008. Burry, therefore, simply looks like someone engaging in the age old past time of "blame the government" for everything.

And while there is obviously plenty to blame the government for in all of this mess, Burry seem to go out of his way to lay such blame on government or individuals only, while being careful in his tacit accusation of "lenders" or "enablers," one of which he probably works for, and many of which he probably works with, on a regular basis (which is probably why this article seems so incredibly biased to me).

Finally, Burry goes on to completely disqualify himself, in my opinion, by stating:

-- "The advances in health care in particular are breathtaking — so many selfless souls are working to advance science, and this is heartening. Long-term, this is good for humans in general. Americans have so much natural entrepreneurial drive."

But the "advances in health care" he is referring to have very little to do with America's "entrepreneurial drive" and much more to do with the American tax payer. For example

"In a study published in the New England Journal of Medicine, researchers found the United States comprised 51 percent of global research spending, at $131 billion in 2007. But by 2012, that number dropped to $119 billion, or 45 percent of the world's biomedical research spending."

Without those billions in government funding, there would likely be very little in terms of "advances in health care," since most of the R&D done by private pharmaceutical companies is spent on cosmetic or erectile dysfunction type drugs, with such R&D spending often being less than half the amount such pharmaceutical companies spend on marketing and advertising.

After all, when it was becoming clear that the momentum had turned in the markets, as Lewis points out, these guys began "selling juice from oranges they knew were rotten," and all to cover their losses. No matter how elaborate, complex, and ubiquitous the scheme may be, in this sense, it is still just a ponzi scheme. As Lewis argues, at the top of this whole scheme, "there were more morons than crooks, but the crooks were higher up," concluding that "the fraud was so obvious that the game either had to be totally rigged, or we had totally lost our minds." And when Burry tried to blow the whistle on the whole crooked game by taking his story to the local newspapers, the newspapers refused to print it. Worse still, when they eventually went to the enforcement arm of the SEC, they didn't want to hear it either.

As Lewis states, Welcome to America, where "the people get free markets and the guys running the show get free money."