What I love about Michael Lewis is his sense of narrative. The subprime mortgage meltdown and Wall Street’s numbing disconnect from Main Street reality are all topics that have been put through the spin cycle again and again and again. Is there really anything new to say?
In the skilled hands of Michael Lewis, the answer is an unqualified yes. Lewis puts forth a crisply reasoned story of mass-delusion – of consumers, investors, bankers, ratings agencies and insurers – a complete and total 'Tulip Mania' to the level that perhaps only 10-20 investors worldwide realized that the subprime mortgage business was a house of cards, and found a way to bet against it.
A market of True Believers is nonetheless still culpable, as Lewis also goes on to show, when its underlying incentive structures virtually ensure that its rank and file will continue 'believing' until their weighty bonuses dry up.
This, the bonus culture, is the integral ‘moral of the story’ from both tonight’s excellent 60 Minutes segment and Lewis’ new book, ‘The Big Short.’
Namely, that people see what they are incentivized to see, which given Wall Street’s bonus culture, coupled with a sense of entitlement fostered by looking within for reference points of worth, as opposed to the larger economy, is a vicious cycle simply begging for another crash to occur.
To be clear, this is less a commentary on “how much” (the compensation amounts) than “for what?” (what constitutes earning the bonuses, what behavior is being incentivized), for as Lewis argues, the business has become divorced from real productivity.
In other words, when you make your (quota/bonus) number by performing transactions that basically destroy the global economy – i.e., transactions that by any definition, should not have happened – that is a fucked up incentive structure.
No less, when Wall Street is earning “record profits” when said profits are essentially "earned" by borrowing from the government at 0% interest and lending back to the government (buying T-Bills, etc.) to make a spread, that is by definition a parasitical relationship between Wall Street and the US Economy, and evidence that Wall Street’s leaders have completely lost any sense of responsibility to society at large.
Therein lies the conundrum. Lewis shows plainly that you have to be very careful how you incentivize people because they will respond to how they are incentivized.
Yet, he also shows that in Wall Street, you have an industry that lives and dies by the Upton Sinclair credo that “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
This is the fuzzy junction point between “The Market is (Ultimately) Self-Correcting” and “Too Big to Fail,” a place made even fuzzier by its co-dependent enabler, Uncle Sam.
How will this story end?
Related Posts:
- True Believers: Make Sense of Another Wall Street Fiasco
- Review of 'The Big Short' by Michael Lewis
- Getting Real: On Doomsday and the Demise of So-Called Experts
