One difference between the previous financial panics and the real estate and subprime-mortgage collapse is the sheer number of people involved. “No money down” was an invitation for people far away from Wall Street to take Wall Street-like risks. Just about everyone in America could afford no money down. It wasn’t a financial market that panicked, it was the larger society; and the list of people and ideas that could plausibly be blamed for the mess was long: ratings agencies, mortgage brokers, mortgage originators, Bill Clinton. Gretchen Morgensen at the New York Times blamed Wall Street, for exploiting the middle class. Wall Street people—who lost a lot more money than the poor—blamed their CEOs.
The 1987 stock market crash was blamed on program trading; the Asian currency crisis was blamed on some combination of hedge funds and IMF-induced policies; the Internet bubble was blamed on Wall Street analysts. The subprime-mortgage panic has yet to find its one big culprit, and I’m not sure it ever will.
Just now there’s a feeling in the air that the American financial system has reached some kind of terminus. In an interesting column, Paul Krugman makes the distinction between liquidity and solvency. It’s one thing to need money to tide you over until the next payday. It’s another to need money because there are no more paydays. In this crisis, unlike the previous three, our problem is not liquidity but solvency. We can’t afford to run our financial system in this manner. Another difference between this panic and the others is the sheer amount of destruction it’s caused inside big Wall Street firms. As of this writing one big firm has collapsed, five CEOs have been fired, 50,000 Wall Street jobs have been lost, and Wall Street shareholders have lost more than a trillion dollars. It’s unlikely that markets will allow the big firms to indulge in the same leverage as they have, or to use complexity to hide the risk being taken. It’s going to be hard for them to get into this much trouble again any time soon.
But that doesn’t mean that the game is over. Since the crash of 1987, when the government set out explicitly to prevent this sort of thing from happening again, the cycles of euphoria and panic have become more and more thrilling: whoever has been seeking to minimize drama in the financial markets has been doing a poor job of it. Step back from it and you can’t help but wonder if anyone is really trying. If perhaps this is the nature of global capitalism—ever more complex, ever more opaque, ever faster booms and busts—and it’s not the markets that need to change but our reaction to them. How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?
—Excerpted from Panic: The Story of Modern Financial Insanity by Michael Lewis. Copyright © 2009 by Michael Lewis and McSweeney’s. Introductions copyright © 2009 by Michael Lewis. With permission of the publisher, W.W. Norton & Company, Inc.