The Big Short

***By the way I've "officially" moved my blog to jennt.tumblr.com. I don't think you can post comments yet but I like the format better. I'll be keeping this blog up until I build a better "history" on my tumblr account.

At the beginning of the year I set a goal to read at least one “non-required” book a month. While this may not seem like a big feat to some people, its a lofty goal in the middle of a full time job and 12 hours of Masters level courses. I’ve done pretty good so far. This month I completed “God of the Possible” and “The Big Short.”

One of my geekiest interests is economics and finance. The concept of mortgage backed securities and the failure of the derivatives market has always fascinated me but I wanted a better understanding. This book is exactly what I was looking for. Michael’s Lewis’ novel tells the story of our current financial crisis from the point of view of people who actually made money when the economy collapsed by shorting (betting against) mortgage backed securities. I know what your thinking, it doesn’t sound entertaining at all. However, the characters are so well developed that by the end of the novel I found myself cheering for the economy to collapse so these guys could get the recognition and money they deserved. My favorite character has aspergers, a lazy eye and no formal training in economics. His obsession with investments leads him to create a consistently profitable private equity fund. When he starts placing multi million dollar bets on the fact that people will default on sub-prime, floating rate mortgages, his investors think he’s gone crazy. I just couldn’t wait for the “I told you so.”

In the prologue, the author admits that he began this story as a “let the market run” Republican. However, by the end of his investigation he found himself convinced that tighter controls and government regulations of, at very least,the bond market aren’t just a good idea but absolutely necessary. Someone needs to protect the world’s economy from the unchecked greed of individual investors and traders. The negligence of ratings agencies is shocking and scary. It seems that economics is more of an art than a hard science. The impact that we will see from the introduction of newly invented bonds and securities (that amount to nothing more than trading not assets but risk itself) into an already unstable economy can only be speculated upon. This scares me. I guess it should scare all of us.

At the risk of starting an entirely different debate, this is exactly why during the last presidential election I would become so frustrated when people suggested that this new “socialism” would ruin our economy. I am not a socialist but I also don’t believe capitalism (at least in its current form) is a perfect economic system. The unchecked capitalism that our whole financial system is built upon is flawed in many ways. If individuals were perfect, sinless and without greed, laissez-faire capitalism would work. However, this is not the case. There must be some control to protect the interest and future of those who don’t have a hand in this financial game.

I’d definitely recommend this book but with the caveat that there is a bit of financial theory and economic vocabulary that I had to struggle through.