With the holidays coming to an end, my little burst of reading books (as opposed to newspapers and blogs) is coming to an end with the recent collection Panic, edited by Michael Lewis, which I got for Christmas. (I also got Snowball, the new biography of Warren Buffett, but that’s 900 pages long, so it may be a while.) The book contains several as-it-happened articles on each of four recent financial panics: the 1987 stock market crash, the 1997-98 emerging markets crisis, the collapse of the Internet bubble, and the thing we’re going through now. It’s long on entertainment – both the entertainment of hearing people say things like, “The more time that goes by, the less concerned I am about a housing bubble,” and the entertainment of reading legitimately good writing, some of it by Lewis himself. But given the format, it’s necessarily short on analysis, and its main point, if any, seems to be that all panics are alike: people underestimate risk, they think they are different, they do silly things, Wall Street people make a killing, and then bad things happen.
I believe the book was released in November, but it seems like the final touches were put on sometime in late spring or early summer – Bear Stearns had fallen, but Freddie and Fannie were still independent, and Lehman was just another investment bank. So the book provides this past summer’s perspective on the crisis: a collapsing housing bubble taking down isolated hedge funds that had invested in mortgage-backed CDOs, and one investment bank (Bear Stearns) for no clearly explained reason: Lewis’s own essay on the topic focuses on the inherent complexity of Wall Street firms and how even their CEOs don’t understand them. Reading the articles from 2007 and early 2008 reminds you how few people if any foresaw the impact the collapsing bubble would have on the financial sector as a whole.
The Baseline Scenario 