The Big Short
Feb. 27th, 2016 09:12 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
mallorys_camera“How do you make poor people feel wealthy when wages are stagnant?” asks Michael Lewis in The Big Short. “You give them cheap loans.”
This is as pithy and insightful a summary of the last 100 years as I have ever read.
I finished The Big Short on the train ride from NYC back up to the quaint and scenic Hudson Valley.
I can’t say I understood more than 20% of the book’s financial analysis – despite the fact that Lewis writes in his prologue that he pictured his ideal reader as his mother, an intelligent woman of a certain age who reads a lot of murder mysteries. That sounds like me, right? But I still have no idea what a credit-default swap or a collateralized debt obligation is.
That’s not Lewis’ fault: He takes great pains to try and explain them. The fact is these concepts are so abstract – the slope of lines tangent to curves that are themselves slopes of lines tangent to curves, reductio almost to the point of ad absurdum – that he might as well have been trying to explain particle physics to Koko the Signing Gorilla. (For the record, I don’t have a particularly good grasp of particle physics either.)
“The Big Wall Street firms,” Lewis writes, “Bear Stearns, Lehman Brothers, Goldman Sachs, Citigroup, and others – had the same goal as any manufacturing business: to pay as little as possible for raw material (home loans) and charge as much as possible for their end product (mortgage bonds.)”
This clarifies the process through which the events leading up to the Great Recession of 2008 took place, but doesn’t do much to illuminate what is the essential paradox in this book: the shimmering, ephemeral nature of money.
###
Here’s what I know about money:
• You probably have more of it than I do.
• It’s still coupled with labor (i.e. earning capacity), but labor is actually looked down upon as a means of accumulating it – a fact that’s brought home to me twice a week when, as a volunteer tax preparer, I view the discrepancies between taxes on labor (high) versus capital gains (low).
• Uncoupled from any standard – gold, silver, moon rocks, oobleck, angel dandruff, a dying god’s slow-congealing thoughts – it’s a completely imaginary construct.
Yet money drives everything we do in the little human ant farm we call society. It’s the cetis parabus premise from which everything else is assumed.
Which is quite staggering and weird if you really start to think about it.
###
I was crushed by the 2008 recession. I lost everything. Literally. My home, my business, my husband, practically everything I owned. I now live in a kind of pastoral afterlife; the human equivalent, perhaps, of one of those sanctuaries for abused animals. Bitter much? Oddly enough, not. Most humans on this planet have had a far worse time than I've had, and truth be told, I’ve never aspired to a lifestyle more luxurious than the one I enjoyed as a grad student.
But I find it quite bemusing that the people responsible for creating the financial collapse as well as the people who wagered that it would happen walked away with hundreds of millions of dollars.
And this is why I think that any rating of the Obama Presidency has to give the man a D+ at best: He bailed the fuckers out; he ensured the maintenance and servicing of the Doomsday Machine so that it would continue to operate. He put Timothy Geithner, Lawrence Summers, and all those other Bush team operatives in charge.
I don’t care if same-sex marriage was legalized under Obama’s watch, or if Obama imposed a creaky system that essentially redistributes the cost of health care so most of the burden now is carried by members of the risk pool themselves (instead of the corporate health care providers) and trumpeted this as reform.
The only reason I don’t flunk Obama altogether is because I’ve liked him in this last year and a half, now that he doesn’t give a fuck about being reelected. I think the Iran treaty is a good thing, and I can’t wait to take a trip to Cuba.
###
Anyway, The Big Short. Excellent book. And damn! Michael Lewis can write.
This is as pithy and insightful a summary of the last 100 years as I have ever read.
I finished The Big Short on the train ride from NYC back up to the quaint and scenic Hudson Valley.
I can’t say I understood more than 20% of the book’s financial analysis – despite the fact that Lewis writes in his prologue that he pictured his ideal reader as his mother, an intelligent woman of a certain age who reads a lot of murder mysteries. That sounds like me, right? But I still have no idea what a credit-default swap or a collateralized debt obligation is.
That’s not Lewis’ fault: He takes great pains to try and explain them. The fact is these concepts are so abstract – the slope of lines tangent to curves that are themselves slopes of lines tangent to curves, reductio almost to the point of ad absurdum – that he might as well have been trying to explain particle physics to Koko the Signing Gorilla. (For the record, I don’t have a particularly good grasp of particle physics either.)
“The Big Wall Street firms,” Lewis writes, “Bear Stearns, Lehman Brothers, Goldman Sachs, Citigroup, and others – had the same goal as any manufacturing business: to pay as little as possible for raw material (home loans) and charge as much as possible for their end product (mortgage bonds.)”
This clarifies the process through which the events leading up to the Great Recession of 2008 took place, but doesn’t do much to illuminate what is the essential paradox in this book: the shimmering, ephemeral nature of money.
###
Here’s what I know about money:
• You probably have more of it than I do.
• It’s still coupled with labor (i.e. earning capacity), but labor is actually looked down upon as a means of accumulating it – a fact that’s brought home to me twice a week when, as a volunteer tax preparer, I view the discrepancies between taxes on labor (high) versus capital gains (low).
• Uncoupled from any standard – gold, silver, moon rocks, oobleck, angel dandruff, a dying god’s slow-congealing thoughts – it’s a completely imaginary construct.
Yet money drives everything we do in the little human ant farm we call society. It’s the cetis parabus premise from which everything else is assumed.
Which is quite staggering and weird if you really start to think about it.
###
I was crushed by the 2008 recession. I lost everything. Literally. My home, my business, my husband, practically everything I owned. I now live in a kind of pastoral afterlife; the human equivalent, perhaps, of one of those sanctuaries for abused animals. Bitter much? Oddly enough, not. Most humans on this planet have had a far worse time than I've had, and truth be told, I’ve never aspired to a lifestyle more luxurious than the one I enjoyed as a grad student.
But I find it quite bemusing that the people responsible for creating the financial collapse as well as the people who wagered that it would happen walked away with hundreds of millions of dollars.
And this is why I think that any rating of the Obama Presidency has to give the man a D+ at best: He bailed the fuckers out; he ensured the maintenance and servicing of the Doomsday Machine so that it would continue to operate. He put Timothy Geithner, Lawrence Summers, and all those other Bush team operatives in charge.
I don’t care if same-sex marriage was legalized under Obama’s watch, or if Obama imposed a creaky system that essentially redistributes the cost of health care so most of the burden now is carried by members of the risk pool themselves (instead of the corporate health care providers) and trumpeted this as reform.
The only reason I don’t flunk Obama altogether is because I’ve liked him in this last year and a half, now that he doesn’t give a fuck about being reelected. I think the Iran treaty is a good thing, and I can’t wait to take a trip to Cuba.
###
Anyway, The Big Short. Excellent book. And damn! Michael Lewis can write.
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no subject
Date: 2016-02-27 04:11 pm (UTC)no subject
Date: 2016-02-27 04:49 pm (UTC)no subject
Date: 2016-02-27 04:47 pm (UTC)I think the Iran deal was Obama's bet on demographics. Iran is a very young country (almost half the population is under 25) and it's possible that, in 15 years, the old hardliners will be gone and the new generation will be less radical. I'm not convinced but I can see where Obama might make this bet.
no subject
Date: 2016-02-27 04:52 pm (UTC)As a parent, I have skin in the "new generation" game, so I'm inclined to believe in that bet. :-)
no subject
Date: 2016-02-27 06:06 pm (UTC)no subject
Date: 2016-02-27 06:16 pm (UTC)I don't necessarily disagree! But, of course, that's exactly why I majored in Economics in college. :-)
no subject
Date: 2016-02-27 06:26 pm (UTC)no subject
Date: 2016-02-27 06:36 pm (UTC)I was a big, big fan of Isaac Asimov's Foundation series when I was in high school, and the real reason I majored in Economics was because UC Berkeley didn't offer a Psychohistory major. :-)
And I tend to agree with you that Economics is useless as a predictive science. Except for game theory. :-)
no subject
Date: 2016-02-27 07:35 pm (UTC)The best contemporary explanation through the mechanics of money I've found so far is Kaoru Yamaguchi's book (you can't get as a book unless you download his PDF) Money and Macrodynamics Economics. https://www.youtube.com/watch?v=XLeTP0THjJQ For Yamaguchi, money, the cost of money (interest), wages and the business cycle interrelate through the stock-inventory fluctuations as material is slowly transformed by businesses. The lag of tech is the cost of transformation as speculative futures, giving money value in terms of business NOW because future monies are not yet achievable.
In a different direction, we get from the very old idea that money is social value. What we don't often get from economics is that money is originally socially value that works as a unit of exchange between outsiders. Within a social unit of insiders, social value is equivocal to something like prestige (reputation). Obviously today the two are overlaid but they are not-equitable, although people do try to transform one into the other. It is only that they are not equitable that they have value and continue to be translatable from one to the other -- but only at a tarrif cost. We see that capitalism has worked steadily to destroy extended family relations and other non-capitalist relations. This is because money does work as a way of binding strangers in exchange relationships -- and in being so successful has started to erode insider groups such as village associations and so on that in the past worked to secure larger networks of exchange.
There is also a paper by a physicist whose name escapes me, which goes towards Lewis, I'd imagine. This paper mathematically describes how in a full financial offering (classically considered the most efficient) with the presence of bounded rationality, firms cannot assess the true risk of their products. Historically capitalism worked by arbitrage, that is the difference between markets in pricing -- the example I like is that the British were eventually able to undercut India's textile industry when the industrial revolution progressed far enough. At that point they were able to enter into "purchasing" India wholesale since the Indian economy had collapsed. Since today there are no longer any markets that constitute a truly separate domain, businesses now attempt to perform arbitrage internally -- trying to find price differentials to capture easy profit between industry thresholds. The problem with this is that at any time a firm today, through a series of holdings and business relations by other firms, could inadvertently end up shorting itself. Bounded rationality hides the complexity of the marketplace so that firms end up being unable to truly represent their risk in offering their financial products. As the market starts to fill in gaps in financial offerings, we run further risk in creating these short circuit loops in market finances that not only define bubbles but inevitably pop them.
no subject
Date: 2016-02-27 07:40 pm (UTC)no subject
Date: 2016-02-28 12:56 am (UTC)These days, I suspect money no longer needs to be a commodity for exchange and only exists so that some people can play poker while others can achieve power.
Are you following that debate over the proposed elimination of the 500 Euro note? A bunch of economist are offering this as an effective means of combatting terrorism and other illegal activities. Attacking money for the one thing that still makes it useful: its fungibility.
no subject
Date: 2016-02-28 02:05 am (UTC)I will check out that book. Thank you.
no subject
Date: 2016-02-29 03:11 pm (UTC)They should have let wall street crash and the big banks fail...
no subject
Date: 2016-02-29 03:26 pm (UTC)And I agree with you 100% -- they should have let Wall Street, AIG, and the big banks go down.
no subject
Date: 2016-03-02 04:09 pm (UTC)no subject
Date: 2016-03-03 08:25 pm (UTC)