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I don't have a lot to say about Michael Lewis's essay on the End of the Wall Street Boom, as it's one of those articles that's Too Good To Blog About. Suffice to say, it's the best, and certainly the most comprehensible, of the recent pieces written on the subject. But I did want to amplify this point:
Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.What's come clear in all of the post-crash reporting is how many people simply didn't know what they were doing. And that's no surprise. UCLA and Santa Cruz didn't send a lot of kids to investment banking, but it seems to have been a rite of passage if you went to an Ivy. When you're 13, you have your Bar Mitzvah, and when you're 22, you have your first Merrill Lynch job offer. And these folks all had the cultural markers of People We Should Trust. They had the right degrees and lots of money and lots of prestige. The signifiers were all correctly aligned. And yet these Masters of the Universe turned out to have been massively stupid and ignorant and irresponsible. A lot of forces contributed to the crisis, but what Lewis's clarifies is that you really can't underestimate the role of the Cult of Finance in not only convincing the country to trust the finance sector, but in getting the finance sector to trust itself. Since everyone was diving into mortgage-backed securities, it had to have been safe for everyone else to follow. And if you didn't, either because you didn't understand the instruments or because you didn't think them worthwhile, you seemed either an idiot or a crank. In theory, the market should correct for this: The possibility of making incredible amounts of money off of everyone else's folly should have been incentive enough to create more contrarian traders. But money isn't as powerful an incentive as you might wish. Social pressures are fierce. People are comfortable in the herd. Lewis's article focuses on Steve Eisman, who did bet against the market. But it's pretty clear that he could only do that because he paired the correct analysis and the correct experience with the correct personality type: Aggressively anti-social and crankish. You can't trust that there will be a lot of those folks around, and if that's the case, you definitely can't trust that people will be brave enough to not be stupid.
