★★★★★ Doing the improbable...

The Big Short: Inside the Doomsday Machine

Michael Lewis

In the book The Big Short: Inside the Doomsday Machine, and even more in the movie made from it, Michael Lewis does something that, if not literally impossible, at least on the face of it looks highly improbable -- he writes a nonfiction book about financial markets leading up to the 2007-2008 Financial Crisis that is as gripping and exciting as the best of fictional thrillers. Even more astounding, he doesn't avoid discussion of the financial derivatives that destroyed financial markets -- instead, he focuses on them.

In the early 2000s, the price of housing in the USA rose because it rose -- investors saw that the price was rising and bought buildings for more than they were worth confident that the price would continue to rise and they would be able to sell for much more than they paid. This sort of thing has happened many times in history and is generically called a "financial bubble". We were reassured by almost every finance professional that the housing market was sound -- that the price of housing had never fallen and that it was, therefore, a sound investment. (I was there and paying attention -- I remember the voices of "There is nothing to worry about." well.) The housing market was not sound.

The Big Short is the story of a small number of investors who realized that a crash was inevitable. They looked for a way to bet that the price of housing would fall. In finance, betting that the price of something is going to fall is known as short-selling. Thus, these investors were looking for a way to short the housing market. That's where the title "The Big Short" comes from. By focusing on this small group of investors and what they learned as they investigated the housing markets, Lewis makes the story personal.

And it really happened! Although the stakes of this thriller are lower than one in which nuclear armageddon is on the line, the world-wide financial crash really happened, and the result was the biggest financial crisis since the Great Depression. It was a devastating event that ruined many people's lives, and ended some. People died. In the movie, but not the book, there is an extraordinary scene in which one of the investors tells two others that for every 1% increase in unemployment, 40,000 people die, and that they are betting for this to happen. It is true.

Should you read the book, or just see the movie? Well, you know who you are -- if you're the sort of person who prefers the book to the movie, then do what comes naturally. Or do both! I did, and I enjoyed both.

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