Saturday, 12 March 2011

The Financial Crisis Within - Michael Lewis

The financial crisis, which began in 2007 in the USA, turned into a global recession and affected American as well as European and Asian markets. The years preceding the crisis were marked by dramatic structural transformations in the American economy and by changes in the real sector. A large number of jobs were exported into developing countries such as China and India. Without any sufficient protection measures, many sectors in the American economy experienced a crisis leading to the inability of the working force in these sectors to pay their loans back; the result was a massive wave of bankruptcies and bank failures. Secondly, before the crisis the market experienced strong economic growth, partially due to the boom of the construction business. The interest rates were low and the government encouraged individuals to buy new homes. The large economic growth lead to a strong competition between banks and financial institutions, which focused on maximizing short-term profits by unprecedented credit expansion. Combined with the free market structure of the financial industry and the lowered governmental regulation this resulted in the collapse of the financial markets. The government intervention was inadequate; it existed but it was not administered correctly and on time. In the presence of this inadequate control the use of complicate financial derivatives lead to a deep recession, decline in trust in the financial markets, unemployment, etc. Moreover, governments had to invest huge amounts of money (which resulted in higher taxes for the common individual) in order to cover the losses and to save the financial system from collapsing.

Understanding the machinations behind the financial crisis is difficult. Most people know only that "it has to do with lending too many mortgage loans". In fact, the doomsday machine from inside is much more complicated. Even the traders, bankers, and investors on Wallstreet do not understand some of the financial derivatives used to trade billions of American dollars from mortgage loans, which eventually lead to the near collapse of the US economic system.

Writing about the financial crisis is also difficult. Actually, writing about it in a way so that people, who are not in the area of finance will understand is actually almost impossible. Yet, Michael Lewis, a former investment trader on Wallstreet manages to produce a masterpiece, that targets not financial experts, but common individuals more or less affected by the crisis. Thus, The Big Short is a not a complicated financial interrogation about the causes and results of the 2007 economic disaster. It is a novel that explores the moral hazards of investors to undertake large risks, the inadequate actions by the US government, and the effects on the American taxpayer in order to save the economy from collapsing. It is a novel about a few people, who were the only ones to predict doomsday in the financial world. Clever but criticized for their beliefs, Steve Eisman, Michael Burry, Charley Ledley, James Mai, Meredith Whitney and Greg Lippmann are the eccentric investors, traders, and analysts who go against the market and end up profitting after the bubble burst. Who are those people, who go against the grain even when most of the financial world ridicules them? What qualities do they possess in order to capture the downfall of the market, when most of its most clever Wall Street participants are blind for the consequences of their actions. How do they manage to defend their point even when all of their clients leave them and the whole financial world condemns them.

Michael Lewis gives us an answer by following the rebellion of these really amazing minds, who forecast the crisis but unfortunately there was no one to listen to them. The novel explores beneath the surface of the glamorous financial world with sarcasm, black humour, and wit. Definitely a worth-reading non-fiction even for people with little or no financial background. Lewis did an outstanding job in being comprehensible and entertaining.

1 comment:

  1. "Without any sufficient protection measures, many sectors in the American economy experienced a crisis leading to the inability of the working force in these sectors to pay their loans back" - This is not at ALL what Michael Lewis is saying. Protectionism only makes us poorer. Ineffective government regulation is certainly part of the story, but there's no way that Lewis is in favor of protectionism.