There is a reality outside of our ideas & our imagination which we may not always be acquainted with. That reality is often the source of opportunity for some & dread for others. I recently finished reading, quite late though, a book by Michael Lewis called The Big Short. I began reading it like just another book on the debt crisis. I had read Lewis’ earlier book called Liar’s Poker which exposed the life on wall street during the high days of 1980’s & the story of his former employer Salomon Brothers. I also watched the Oscar award winning documentary on the financial crisis called – The Inside Job. Both of these essentially hold the same views but have shown the same information from different points of view. I recommend you to experience both of them.
The Big Short, like other books I had read about the crisis, does the same thing that his previous book did. Exposes the culture on Wall Street & how various regulators behave in times of boom. The book is basically about how a few people identified the problems in the financial market & placed their bets against it. It quickly becomes apparant that it’s not wise to think in terms what’s good or what’s bad, but it’s very important to switch it with whom to trust & who not to trust.
We all want free markets & love policies that foster business growth, create more jobs, improve standard of living & more. That includes a lot of de-regulation, hoping that there would be very less intervention from authorities which will help people make business decisions quicker than before. This is popularly known as laissez-faire. A free market economy. The problem with this imagination is the underlying assumption. We assume that everyone is righteous & has the best possible intentions. We assume that the system will work with evolutionary precision, just as in nature where weaker & less efficient systems are removed & only the most robust systems will thrive. But we have been through ample amount of evidence so far to conclude that we do deviate from nature, as human beings we respond to incentives in a very strong way.
From the 1980’s till now, there have been at least 5 separate occassions when the global financial markets have been threatened by systemic failures, eroding tonnes of investor’s capital. The reasons are widely known & yet the various participants function in exactly the same way. The know-it-all behavior of analysts, which cost them their opinions but not their jobs, the excess leveraging which costs many companies’ their existence, the investors who still ‘trust’ other people to manage their money or invest without understanding the product/security very well. It’s all still here, with different versions & different people. Obviously there is a weeding process with each crisis when the old weeds are removed. But instead of having a cleaner patch of land there is usually new weed that grows in the same place.
So does it mean we should abandon all hope from the capitalist system? Should we not trust anyone in the market? Well, that would be taking things too far. Just like some people are out there to find suckers there are others who are genuinely interested in finding good opportunities to create a better system. Promoters who honestly go on conducting their businesses, not caring a damn about any analyst & watching over their leverage like a hawk end up doing a lot better in the long run, for themselves & for the society. Finance is usually seen as a profession which doesn’t really add any value to society, well if it didn’t then it wouldn’t have existed in the first place. Its job is optimum capital allocation & providing liquidity to businesses/individuals. In short, it’s the oil that lubricates the capitalist machine.
This machine has a lot of chinks that allows unscrupulous people to get in, but the machine works. We have witnessed it work at full power in our country over the past 2 decades & over the past centuries across the globe. As participants in the system, creators or consumers, it becomes our job to show restraint in times of prosperity by not getting carried away. We must understand our need to get something for nothing & replace it with something for something more. Perhaps a simple rule to follow would be – ‘if you don’t understand the product, don’t buy it.’
John Gutfreund, the former head of Salomon Brothers & Michael Lewis’ former boss – meets with him before the book is released & says what I think aptly summarizes the effects of greed on the system:
“Its laissez-faire until you get into deep s**t.”