Very interesting interview of Wall Street insider Barry Ritholtz about the causes of the financial crisis and suggested reading on the subject. If you are one of those,ahem, "informed" conks and acolytes of the "rational free market" who still want to blame it on the CRA you might not want to read this.
I originally thought we were going to be talking about Wall Street today. But I got the sense from some of your book choices that one of the biggest offenders wasn’t based on Wall Street at all, but on Constitution Avenue in Washington, D.C.
When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years.
If I had been the Fed chief, I would have said: “Let me explain this to you, Jamie. I know the history of JP Morgan.” (Everybody thinks Dimon is this genius who avoided the subprime situation, but that’s actually not true. They just ran into their subprime problem way earlier than everybody else, so when they had to liquidate, there was a bid there.) “I’m looking at the derivative book of Bear Stearns. It’s $8 trillion and you’re the single biggest counterparty. So if they go down, it’s your problem. So here is what I am willing to do. When you go into receivership, I’ll promise not to put you in jail
Going back to the underlying causes, the American obsession with deregulation played a big part. Your second book, “The Myth of the Rational Market” looks at the intellectual underpinnings of that worldview.
Yes, so everything was working fine. The original concept – which started under Carter but was accelerated under Reagan – was that government has gotten too unwieldy. Regulation is too costly, too time-consuming and there’s too much red tape. There is a legitimate argument that bureaucracies tend to feed on themselves, and you have to constantly hack back at some of the vines and undergrowth. But somehow, “Let’s clear out some regulations and make it easier for business,” morphed over time to become, “The market knows better than anybody else, let’s get rid of any and all oversight, any and all regulation, any and all things that get in the way of the efficient market.” So what started out as, “Let’s clear out some of the excesses,” became, “Let’s get rid of all the rules.”
Let’s get on to your last book, which you’ve chosen because it best expresses outrage about what happened: “Griftopia” by Matt Taibbi.
Matt Taibbi is the poet laureate of vitriol. There is no one better to capture the gestalt of the country’s angst, fury, and anger, and how upset people are that, essentially, these banks blew themselves up, and then managed to twist Congress’s arm to give them billions of dollars, much of which, by the way, has not been repaid. Every time I see some idiot say all the TARP [Troubled Asset Relief Program] and bailouts have been repaid, it’s nonsense. Even if you count all the Citigroup stock, all the Bank of America stock and the GM stock – none of which you can really sell because you’ll crush the stock price – we’re not back to break-even. We still have massive liabilities thanks to the huge losses at Freddie [Mac] and Fannie [Mae] and the losses at AIG. And anyway, who undertakes a trillion dollars’ worth of risk in order to break even?
Let’s go on to Michael Lewis’s book, “The Big Short.”
Michael Lewis, to me, is the preeminent narrator [of this crisis]. He is the guy who constructs the story better than anybody else. He tells the narrative in just an utterly fascinating and delightful way. I have a review of “The Big Short” that I haven’t published yet, because it’s too profane. There’s a story in there of a fund manager who starts out as an archconservative, and ends up, at the end of the crisis, as this staunch liberal. That’s because he sees the entire subprime, securitisation thing as nothing more than Wall Street finally figuring how to extract profit from the poor. There’s a whole section of the book where he rails about it being an attempt to “fuck the poor.”
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