Michael Lewis on the Next Crisis
Sept. 9, 2013: Sales of Lewis’s The Big Short reach 691,000 print copies in the U.S.
Was Lehman unjustly singled out when it was allowed to fail?
Lehman Brothers was the only one that experienced justice. They should’ve all been left to the mercy of the marketplace. I don’t feel, oh, how sad that Lehman went down. I feel, how sad that Goldman Sachs and Morgan Stanley didn’t follow. I would’ve liked to have seen the crisis play itself out more. The problem is, we would’ve all paid the price. It’s a close call, but I think the long-term effects would’ve been better.
What surprised you most while reporting on the crisis?
The realization that it had actually paid for everyone to behave the way they behaved. Working on The Big Short, I first thought of it as this bet, and there were winners and losers on both sides of the bet. In one sense there was—but on Wall Street, even the losers got rich. So that was the thing I couldn’t get out of my head: that failure was so well-rewarded. It wasn’t that they’d been foolish and idiotic. They’d been incentivized to do disastrous things.
Henry Paulson, the man behind the bank bailouts, recently said, “The root cause of every financial crisis is flawed government policies.” Is that fair?
Some of the government’s policies have been idiotic. But the idea that the story begins and ends with government policy is insane. Wall Street, all by itself, orchestrated the crisis by a web of deceit that was breathtaking. If Wall Street continues to operate in that spirit, I would argue that there’s almost nothing the government can do to prevent them from doing bad things. Incentives are at the bottom of it all. At the gambling end of Wall Street, the people who are making decisions are making decisions not with their money, but with other people’s money, [so] they themselves are not personally responsible.
The other things at the bottom of it all are core to the human condition—optimism, gullibility, greed, panic. Is there any way, finally, to prevent people from behaving this way?
Yeah, what can you do? Well, you can lessen the reward for behaving this way. You can punish people more for behaving in this way. Part of this story is the story of a moral problem, and the moral problem grows out of the change in the structure of Wall Street. When there were partnerships and people’s money was on the line … they were encouraged to behave in ways that were to the long-term benefit of the organizations they belonged to. Long-term behavior is just much different from short-term behavior—it encourages a different morality. And for several decades on Wall Street, the short-term sensibility has been encouraged and compensated very highly. So what you’ve got is a culture that is all about that. Whether they say it or not, that’s sort of the water in which the fish swim. I think as a result you have, basically, total neglect of social responsibility.
Is this related to wealth inequity, the 1 Percent?
It isn’t because of what people are worth. It’s because their incentive system has changed, [which has] changed the values of people who were there. I think that’s a big problem. And the result is that people don’t trust the system. Why would you? The cost of the mistrust is hard to measure, but it’s big. If you’d asked me [in 2008], is the reform process going to play itself out the way that it has, I’d have said, No way—there’s going to be a more drastic change in the system. But there hasn’t been. I don’t know what it takes, what other crises would have to come down the pipe.
Has Silicon Valley replaced Wall Street as the place for bright young people to make their millions?
My sense is that even though the financial crisis has lessened the appeal of the big Wall Street firm, it’s still appealing to kids in school, for the simple reason that unlike Silicon Valley, where you do have to know something to break in, the barriers to entry on Wall Street are quite low once you have the [Ivy League] credentials. If you’re a certain kind of kid who doesn’t actually know anything about anything, Wall Street is still a great place to go.
Are you able to sleep easier now, or are things as tenuous as ever?
I’m in an emotionally complicated position: The worse it gets, the better it is for me. In a weird way, the worst thing that could happen is for the financial sector to figure out how to behave.
Is there a particular threat you’ve identified that’s most likely to blow up next?
The answer is yes, but I can’t talk about it yet, because I’m in the middle of a book about it. It’ll come out next March.
And will that be before or after it erupts?
I can’t actually tell.