Michael Lewis’s Panic!: The Story of Modern Financial Insanity (2009) misleads
its readers to an extent: rather than consisting of journalism entirely by the
editor himself, the anthology contains a series of individual articles by a
variety of authors spanning from July 27, 1987 to January 15, 2008. Lewis pens
a few of these, but his most important contribution is the arrangement of the
articles from the 1987, 1997, and 2000 financial crises as preparation for the
most recent economic downturn. Marked by the proliferation of subprime and
adjustable rate mortgages in the housing market, the articles spanning the past
three decades of American economics illustrate the circumstances that allowed
for these economic structures. Each of these market failures contains within it
a healthy economy experiencing the boom-and-bust structure of American
free-market capitalism, but Lewis’s choice of articles also identifies the
dangerous bubbles that emerge within these markets because of three
interdependent factors. Speculation, technology and the dishonesty of
power-hungry leaders all destroy investor confidence, and whether legitimate
concerns or fallacies, rumors of their demise begin a pattern of panicked
trading that inevitably leads to financial instability.
Lewis initially
points to the danger of speculation in his coverage of the 1987 financial crash
that “marked the beginning of something else too—a collapse brought on not by
real or even perceived economic problems but the new complexity of financial
markets” (4). On Black Monday in 1987, panic ensued after stock indexes
diverged in price from their futures index. The problem, as Lester C. Thurow
explains in one article, rests with the rise in popularity of portfolio
insurance, a technique that automatically buys and sells stocks based upon
movements in the market that trigger activity. Not surprisingly, many of the
articles from this time period discuss the role of technology, as these
automatic triggers within program trading software allow for more efficient trade
but reduce the security of human judgment. Lewis acknowledges his own reckless
behavior during early pre-journalism days at former Wall Street behemoth
Salomon Brothers when he admits that, “it was striking how little control we
had of events, particularly in view of how assiduously we cultivated the
appearance of being in charge” (38).
Technology-led institutional failure does not limit itself to 1987,
either. As later documentation supports, the early 2000’s saw the rise of a
technology bubble because of the newfound Internet boom. Investors poured money
into new technology such as Healtheon, a website that appeared as a foolproof
new industry with its “Chart of Many Bubbles” (179). In effect, the 1980’s saw
a trend of increasing individualism that continues into the early 2000’s: from
the role of speculators to the small investors in 1987, Lewis outlines the
extent to which the markets can be managed without the role of enormous Wall
Street firms.
A natural
development that emerges from this argument concerns the role of individuals
within these big Wall Street firms and their power to single-handedly harm the
U.S. economy. In the 1990’s, for instance, John Meriwether’s Long Term Capital
Management had to be bailed out by the U.S. government only weeks after the
Dow’s 512-point drop. Further exacerbating the crisis is the panic ensuing in
Asia following the implosion of the Thai baht; speculators shorted the currency
and hastened the destruction of the markets in Thailand. And while Alan
Greenspan does not avoid judgment, Lewis’ focus on Meriwether and others such
as Jim Clark (see Healtheon, Netscape) and John Gutfeund (Salomon Brothers)
implies a stronger critique of those he believes intentionally allowed for harm
to come to the economy in order to further their own individual gains. Crony
capitalism, briefly outlined in one article through a study of the Mexican
tequila crisis, exists even in the democratic U.S. Lewis’ condemnation of some
businessmen does not apply universally, as he documents the brilliance of
George Soros and his commanding authority following the Russian central bank
crisis. By Lewis’s design, what appears most alarming is the level to which a
single individual can control the outcome of the country’s financial markets, a
dangerous development that the country experiences again and again.
Elements
of the stock market crash in 1987, the 1997 implosion by Long-Term Capital that
destroyed international capital flows, and the dot-com boom in 2000 combine to
predict problems that contributed to the current economic stagnation. Jim Cramer’s
brief endorsement of $30 shares of James Cayne’s Bear Stearns Cos. on
theStreet.com, for instance, hints at the unpredictability of Wall Street firms
present since the rise of Salomon Brothers in the 1980s while also illustrating
the danger of the (formerly new) Internet technology (343). Furthermore, a
widening wealth disparity demonstrates vestiges of crony capitalism when John
Paulson bets against the housing market and makes $15 billion in 2007 while
thousands of Americans lose their homes and livelihoods. In essence, Lewis
provides a historical background for each of the elements of the current
crisis, ultimately compiling evidence that illustrates the danger of a
boom-and-bust economy destined for crisis in the late 2000s. While the current
financial situation may not mimic each of the previous three crises, articles
handpicked by Lewis demonstrate the extent to which the economic disaster today
contains the vestiges of past problems.
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