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(disclosure: I've read the book, enjoyed it, learned a bunch, but also thought it had some weaknesses... Also, the author of this review has a competing book,

(disclosure: I've read the book, enjoyed it, learned a bunch, but also thought it had some weaknesses... Also, the author of this review has a competing book, which should just be noted.) Although I agree that there are weaknesses that flow from Lewis using the forms of fiction story telling (plot arc, conflict, protagonists, etc.) to tell a non-fiction story, I think a weakness of this review is that it ducks the main scandal: the lack of regulation. [Note, this may be covered in the author's book, EConned, I don't know, I haven't read it, though I did just order it.] Obviously, the people participating in the market who made money were "part of the problem" -- but the bigger problem was the lack of regulation for an area of the economy that is so significant the rest of us have to bail it out (privatized profit, socialized risk). This allowed, among other things: 1. rating agencies to lie -- they had an economic incentive to do so (fees from investment banks) and no one to stop them (so much of the market is legally bound to use/rely on them). It's incredible in the wake of this that S&P, Moody's, etc. still exist. They participated in the largest fraud in capitalism's history. 2. an opaque market in instruments that grew so large the rest of us were on the hook for it. This is the largest transfer of wealth in history and it's still not clear what the hell happened. The BP oil spill looks transparent compared to what went on here.

arethuza 16y ago
From what I recall of the book it made it sound like the rating agencies were incompetent and the investment banks exploited this weakness to get their CDOs of crappy mortgages rated AAA. I agree that it is amazing that these organizations still exist after having arguably been the main cause of so much chaos.
anamax 16y ago
> but the bigger problem was the lack of regulation Except that the problem was actually the regulation. Let's look at your examples. > 1. rating agencies to lie -- they had an economic incentive to do so The rating agencies had a govt mandated monopoly - that's a creation of regulation. That pretty much guarantees that their failures will cause system failures. Note that the regulation in this case pushed that failure into the core of the banking system. The ratings determined whether something counted as an asset, so when they got it wrong, banks tanked. Note that regulation also said that "insurance" on mortgage-backed securities made them safe. The regulators did this because they wanted banks to hold more MBS, which makes them cheaper, which causes more of them to be created, and so on. > 2. an opaque market in instruments that grew so large the rest of us were on the hook for it. This is the largest transfer of wealth in history and it's still not clear what the hell happened. Sure it is. Politically connected institutions were made whole. (Example - We gave money to AIG to pay its debts to Goldman Sachs.) We're still pissing money into Fannie and Freddie. Regulation is systemic risk. Note that regulators don't have any skin in the game and politicians have even less. (I'm looking at you Barney Frank and Chris Dodd.)

arethuza 16y ago

From what I recall of the book it made it sound like the rating agencies were incompetent and the investment banks exploited this weakness to get their CDOs of crappy mortgages rated AAA. I agree that it is amazing that these organizations still exist after having arguably been the main cause of so much chaos.

anamax 16y ago

> but the bigger problem was the lack of regulation Except that the problem was actually the regulation. Let's look at your examples. > 1. rating agencies to lie -- they had an economic incentive to do so The rating agencies had a govt mandated monopoly - that's a creation of regulation. That pretty much guarantees that their failures will cause system failures. Note that the regulation in this case pushed that failure into the core of the banking system. The ratings determined whether something counted as an asset, so when they got it wrong, banks tanked. Note that regulation also said that "insurance" on mortgage-backed securities made them safe. The regulators did this because they wanted banks to hold more MBS, which makes them cheaper, which causes more of them to be created, and so on. > 2. an opaque market in instruments that grew so large the rest of us were on the hook for it. This is the largest transfer of wealth in history and it's still not clear what the hell happened. Sure it is. Politically connected institutions were made whole. (Example - We gave money to AIG to pay its debts to Goldman Sachs.) We're still pissing money into Fannie and Freddie. Regulation is systemic risk. Note that regulators don't have any skin in the game and politicians have even less. (I'm looking at you Barney Frank and Chris Dodd.)