More wisdom from Michael Burry

The causes of the GFC are more nuanced than lack of regulation or greedy bankers. 

Like many, I’m looking forward to seeing The Big Short. Based on the book of the same name by Michael Lewis it tells the story of a few brave souls who foresaw the US housing bust and made millions.

One of Lewis’s heroes is former hedge fund manager Dr Michael Burry and he was recently interviewed by New York Magazine.

In my view, along with the Federal Reserve keeping interest rates too low for too long after the early 2000s recession – and thus helping ignite the US housing boom – lack of personal responsibility was also a major cause of the financial crisis.

So it was interesting to read Burry’s comments on this very point:

If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense.

I couldn’t agree more.

Whilst the Federal Reserve and bankers who sold dodgy mortgages should shoulder their share of the blame, greedy American housing ‘investors’ who didn’t consider whether they could afford their mortgages and didn’t bother reading the fine print are just as guilty.

Unfortunately, for obvious reasons and to everyone's detriment, very few politicians are willing to point this out.

Even worse, most of the reforms made in response to the crisis have been counterproductive, to say the least. Michael Burry again:

The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

I recommend you read the whole thing. And with the world still struggling to recover seven years after the GFC, I hope the leaders and business people meeting in Davos also do so. 

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