So is it going to happen again? Another crippling financial maelstrom, I mean.

I guess we haven’t yet reached the period of complacency that was said would follow the “subprime crisis” or the “financial mess” or whatever you want to call it. People are still angry at bankers. But the news yaps less about finance than it did 1 or 2 years ago.

Anyway, the US stock market has been up and down—but more uppish for about two years now:

Chart of an index of the finance & insurance industry, plus S&P 500.
Google's finance & insurance index
Google's finance & insurance index, year-on-year change

Everybody said during the heat of the crisis that “the real problem” was not necessarily this moment — but would depend upon vigilance enduring for years.

Well, have people forgotten about the bonuses? the leverage? the national debt? the foreclosed homes? the bailouts?

Part of me says no, but I do sense a waning in American anger.

Let me quote from the Amazon Preview of The Big Short, which is all I read:

What’s strange … is that pretty much all the people from both sides of the gamble left the table rich. … Wing Chau’s CDO business went bust, but he, too, left with millions of dollars … he had lost billions of dollars of other people’s money.  Howie Hubler lost more money than any trader in the history of Wall Street—and yet he [kept] the tens of millions of dollars he had made. The CEO’s of every major Wall Street firm were also on the wrong side of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

What are the odds that people will make smart decisions if they don’t need to make smart decisions—if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they’re still all wrong.

So there you have it. EconTalk said all along that we should have let the baddies fail, eat the pain, and then it wouldn’t happen again. The news was talking about Goldman’s congressional hearings a few months ago. That seemed related to the incentive to rip one’s customers off. And there was definitely a furore. But that happened after the ‘87 crash too. And there was enough public interest in the LTCM disaster to justify books and articles. But still the incentives didn’t change. And according to Lewis’ book, they still haven’t changed.

Other themes of the book:

  • partnerships bet with their own money; corporations bet with other people’s money
  • stock analysts are expected to lie or at least find a muted way to say “Your company sucks”

About isomorphismes

Argonaut: someone engaged in a dangerous but potentially rewarding adventure.
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