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Reflections on "The Big Short"
I have not yet seen "The Big Short" movie. Everyone tells me it was excellent. I intend to see it, but I already know what happened in detail, how, and why.
The Fed has not yet admitted its role, nor have banks, nor have the rating agencies, nor has Congress with its ludicrous affordable housing programs, nor has Bush with the "Ownership Society".
I could go on and on and on. But I left off one key set of people: Individuals blaming everyone else but themselves.
An article just came my way expressing that same viewpoint. It's a New York Magazine Interview With Michael Burry, Real-Life Market Genius From The Big Short, head of Scion Asset Management.
NY: Were you surprised no one went to jail?
Burry: I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either.
NY: When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes?
Burry: Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. 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. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. 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. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.
NY: How do you think all of this affected people's perception of the System, in general?
Burry: The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.
NY: Where do we stand now, economically?
Burry: Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.
I have seen so many people blaming mortgage companies, big banks, and especially the repeal of the Glass-Steagall act. All three were peripheral agents, at best.
Actually, I do not think the repeal of the Glass-Steagall act had anything to do with the crisis at all.
I commented on the Glass-Steagall Fallacy on January 21, 2010.
Merits of Glass-SteagallPaul Volcker on Glass-Steagall
The idea that Glass-Steagall would have done much, if anything to prevent this crisis is potty. Goldman Sachs, Bear Stearns, and Lehman would all have done what they did. Wells Fargo would have kept its pool of option arms, and the rest of the banks would have followed their lend to securitize model and the regional banks would still be losing their asses on silly commercial real estate deals.
That said, I am in favor of these initiatives for the simple reason they help prevent fraud. Many of the large institutions hand out advice and trade against it. Goldman Sachs is accused of front-running trades. Their disclosure documents even allow it.
Unconvinced? Then please consider Volcker's Quest To Reinstate Glass-Steagall.
The loudest argument to bring back Glass-Steagall usually goes something like this: Depository institutions (commercial banks) need to be very safe and stable. If you allow investment banks to take big risks with those deposits, bad things can happen.Fed the Key Enabler
Now let's take a step back. What are these risky securities we're talking about? They're bonds backed by real estate -- originated by commercial banks. So really, it was the commercial banks that took the crazy risks that almost broke the economy. If there was never securitization, and the same subprime loans were made, then we'd have very, very sick depository institutions, but investment banks would have been largely unscathed.
Of course, there was securitization, and that was done by the investment banks. Where might Glass-Steagall have helped here? Well, it wouldn't have. Securitization existed before the Act was repealed, and it would exist if it's brought back. Commercial banks can still sell mortgages into giant pools for investment banks to make securities out of, with or without the mortgage originators and bankers living under the same umbrella. Commercial banks also still would have retained lots of their mortgage exposure, and still been quite sick. Just ask Countrywide.
Few mention the Fed as the key enabler. Even fewer see the role of individual people all rushing like mad to get into housing "before it's too late".
Those hurt in the crisis all tend to point a finger at someone else. Too few admit personal responsibility.
That said, bailing out the banks was criminal. So were lies by the bank executives. So was the role of the rating agencies. But who is responsible for making the rating agencies the beasts they are?
Those who do not know the answer will be surprised: The answer is the SEC.
I wrote about the rating agency mess before the crisis, September 28, 2007 to be precise. If you have not yet done so, please consider Time To Break Up The Credit Rating Cartel.
Here We Are Again
Here we are again, back in one hell of a bubble that almost no one sees. Most of those who do see the bubbles are still content to play the greater fool's game in belief they can get out on time.
Mathematically it's impossible for the masses to escape bubbles.
When the next downturn hits, everyone will cry out for the Fed to do something. The Fed already did: It enabled bubbles in 2000, 2007, and now.
People like bubbles, until they pop, then they blame everyone but themselves for participating in them.
Mike "Mish" Shedlock