Housing

Michael Lewis On Wall Street's Mass Delusion

optical illusion

Michael Lewis is everywhere this week flogging his new book, The Big Short.

The book tells the story of the subprime mortgage collapse through the eyes of a few outsiders who bet against the market when almost the whole world was betting for it.In an interview yesterday on All Things Considered, Lewis compared the market to that old optical illusion pictured above:

... you look at a drawing and from one angle it looks like a gorgeous woman in profile. and from another angle actually what you're doing is staring into the face of a horrible old witch. 99.9 percent of the people in the financial system saw this beautiful woman in profile, and this .1 percent of the people saw this horrible old witch. And the question is, why did those people see this thing?

More often than not, the people at the center of the doomsday machine were deluded themselves. And the problem isn't criminal behavior. ... The story of American capitalism in recent history is not really the story of Bernie Madoff. It's a story of very bad incentives causing people to behave in very bad but probably perfectly legal ways. ... The failure so far in the response to the crisis has not been the failure to lynch a few people. It's been a failure to introduce a few rather obvious reforms.

In particular, Lewis points to credit-default swaps — financial instruments that were central to the crisis and are still largely unregulated. There's more Lewispalooza at the Daily Show and 60 Minutes. And the WSJ's Deal Journal cleverly interviews the author of a Harvard senior thesis on the subprime CDO market that Lewis praises in the book.

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