"For the past two decades, Michael Lewis, the most charming and one of the shrewdest guides to America’s raucous money culture, has displayed a knack for being at the right place at the right time. He was a young trader on the Salomon Brothers bond desk during the 1987 crash; the experience led to “Liar’s Poker.” His boss at Salomon, John Meriwether, a decade later became a central figure in the downfall of the hedge fund Long-Term Capital Management. Lewis spent a chunk of the 1990s in Silicon Valley, where he profiled the serial entrepreneur Jim Clark in “The New New Thing” and happened on to his next great subject, the Oakland A’s (“Moneyball”). Now, just in time for the Great Credit Debacle of 2008, Lewis has curated “Panic,” a prose exhibition on the past 20 years of monetary madness.
The new book, Lewis writes, is an effort “to recreate the more recent financial panics, in an attempt to show how financial markets now operate.” Of course, after reading this lively, frequently fine collection of newspaper articles, magazine features, academic post-mortems and the odd blog entry, you’ll find the markets are still something of a mystery. The volatility and gut-wrenching jolts seem to defy any rational expectation. “The bottom line is, no one knows,” the economist Franklin Edwards wrote in his introduction to a collection of studies on the crash of 1987.
The new book, Lewis writes, is an effort “to recreate the more recent financial panics, in an attempt to show how financial markets now operate.” Of course, after reading this lively, frequently fine collection of newspaper articles, magazine features, academic post-mortems and the odd blog entry, you’ll find the markets are still something of a mystery. The volatility and gut-wrenching jolts seem to defy any rational expectation. “The bottom line is, no one knows,” the economist Franklin Edwards wrote in his introduction to a collection of studies on the crash of 1987.
Still, paging through “Panic” is like wandering through an eclectic museum that houses old masters (Nobel laureates like Paul Krugman and Joseph Stiglitz), but also folk artists (the satirist Dave Barry), artisans (beat reporters) and figurative painters (magazine writers like Lewis, John Cassidy and Roger Lowenstein).
“Panic” covers four major episodes: the 1987 United States stock market crash, the 1997-98 emerging-market bust-ups (called “Foreigners Gone Wild”), the dot-com meltdown and the current housing/credit/stock market collapse. Each is a triptych — the first panel is a brief essay by Lewis, the second is filled with contemporaneous newspaper or magazine articles that set up the boom, and the third presents sober analysis of why it happened. While being anthologized is usually a badge of honor for writers, some of the articles were plainly chosen for the way in which they typified the dangerous pre-panic zeitgeist, capturing “the feeling in the air immediately before things went wrong,” as Lewis puts it. I suspect the authors of the Time article from July 1987 on how individual investors were riding the bull market, and of the January 1996 New York Times article extolling emerging market mutual funds, now regard these works the way my brothers and I regard bell-bottom pants — signs of youthful indiscretion that are best forgotten.
But there are plenty of gems, especially involving the 1987 crash, which now seems quaint. An excerpt from a book by the former Wall Street Journal reporter Tim Metz sheds light on the chaos in the markets then. More broadly, the entries remind us that before CNBC, Yahoo Finance and E*Trade, those not sufficiently with it to possess a hand-held Quotron had to visit brokerage offices to check stock quotes.
What else is noteworthy? Paul Krugman’s dissection in Fortune of what went wrong in Asia in 1998, a Jeffrey Sachs interview on what went wrong in Russia. The Wall Street Journal’s 1998 article on how the stock of the second-tier book retailer Books-A-Million went on a wild rise after the company introduced its new Web site and Katharine Mieszkowski’s May 2000 Salon account on dot-coms’ blowing millions of dollars on Super Bowl advertisements don’t taste as good as Proust’s madeleine. But they sure take you back. Mark Gimein’s July 2000 Fortune article on AllAdvantage, which paid people 53 cents an hour to surf the Net with a special advertising bar on their screens, is a howler. The headline: “Meet the Dumbest Dot-Com in the World.”
The most recent episode, which Lewis calls “The People’s Panic,” is less funny — it’s too close, it roped in many more people, and the costs to the public are likely to be huge. The bailouts are especially galling given the ample warnings, like those sounded by John Cassidy of The New Yorker, who warned in November 2002 that housing would be the next crash. A single entry from the Irvine Housing Blog, which shows how a person in January 2005 bought a $1.157 million house with $270 down, refinanced with a funky teaser-rate mortgage and then proceeded to open up a $491,000 home equity line of credit by 2007, neatly encapsulates the lunacy.
Some of the best entries are Lewis’s own, including his January 1999 New York Times Magazine article on the failed hedge fund Long-Term Capital Management. The quantitative geniuses who designed this vehicle had a tough time grappling with the fact that their model had failed. “It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world,” Lewis writes. In each of the episodes, the bottom fell out because a bedrock belief held by many participants — smart professionals, not the perennially stupid individual investor — suddenly evaporated. “Panic” is to a large degree a chronicle of the capacity of highly paid professionals for self-delusion.
This volume could just as easily have been titled “Complacency.” As Lewis shows, there’s something distinctly American in our propensity to blow bubbles until they pop, spend a few months licking our wounds and then hit replay. “Yuppies’ Last Rites Readied,” declared the headline on a New York Times article of Oct. 21, 1987, which documented how the stock market crash was causing materialist, money-soaked urban dwellers to reduce conspicuous consumption and focus more on human relationships. Of course, that moral awakening lasted only as long as the downturn. And the same business publications that do such a great job of dissecting the bubbles once they’ve popped are the same ones that help promote and sustain the next one. What drives this? It’s not simply greed, or stupidity, but a kind of learned naïveté. We convince ourselves, over and over again, that nothing can go wrong, and that even if it does the smart ones among us will be insulated from any ill effects. Despite Suze Orman’s pleas, as financial beings we lack self-awareness and irony. In October 2000, Jerry Useem of Fortune called prominent players and asked what they had learned from the dot-com bust. James Cramer, hedge fund manager, media personality and founder of TheStreet.com, declared the Internet over and spoke of spending his time coaching soccer. “I’m done with the material stuff.” Riiight.
In these times, $27.95 may seem a steep price to pay for a collection of articles, many of which can be found online. But there are good reasons to splurge. The book’s profits are going to charity. And as of mid-December, used copies were trading hands on the secondary market (Amazon) for $13. In other words, after a few weeks of ownership, this book still retains about half its value. Which is more than can be said for Citigroup stock."
PANIC
The Story of Modern Financial Insanity
Edited by Michael Lewis
