Posted by: Dirk | November 29, 2010

(Book review) The Big Short

Michael Lewis, author of Liar`s Poker, a description of the Wall Street in the 1980s, has returned with a new book on the same subject.His story is very simple. Some people are trying to short the mortgage-backed securities because they strongly believe that house prices will not rise forever. Well, even a slight fall in prices would leave many home owners under water, defaulting the loan(s).

The book’s narrative is clever, since it follows the people who bet against the mortgage-backed assets and which set out in a journey to understand who is willing to bet against them and why. This is very entertaining and even funny, when supposedly know-it-all Wall Street’s big bankers are confronted with the world view of the people who go short big. The book tells the story of the financial crisis from a very human point of view since it follows some main characters around and describes how complicated the financial system has become, how people struggle with its opaqueness and in the end rely on heuristics and herd behavior to come to grips with it.

The descriptions of the characters and their not-trusting-each-other, their struggling to stay ahead of things and their little stories provide an excellent background for understanding why the financial crisis happened. It wasn’t just greed, it was more like negligence, if I understand that concept correctly. People were basically very sloppy thinkers, relying on an overload of short-term data and ignoring that the future might be different from the (near) past. Cozy relationships helped, but these existed for many years. What would be interesting now is to understand why so much money was flowing around (“global imbalances”?) and why Düsseldorf bought such a huge amount of toxic assets (“European imbalances”?).

I recommend the book to non-economists especially, since the story is more easy to follow and less technical than Gary Gorton’s account, which basically tells the same story from a professional (financial) economist’s point of view.

(I have read the German version, which is why I didn’t use references in the text above)

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Responses

  1. […] could only do so after finding the right people to start the market (which is the story of ‘The Big Short‘). Here is what Kaufman concludes: The result of Wall Street’s venture into grain and […]


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