I will spare you my comments here since most of this is beyond my area of competence. But, we should pay attention to Michael Burry’s views on America’s current economic conditions, just because he is Michael Burry.
You recall Michael Burry? He was a leading character in the Michael Lewis book (now a major motion picture) called The Big Short. Way back before the crash of 2008 Burry found a way to short mortgage backed securities. He made a fortune in the crash, so he is worth reading… whether he is right or wrong.
How does he see the financial crisis now? He had hoped that the players in the government and business would have taken personal responsibility for what happened. And yet, they simply shifted the blame. It’s an important theme around here, so it is interesting to see how Burry explains what happened:
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.
And Burry points out that those who borrowed money at zero interest rates are also to blame. It recalls a remark I made recently about affirmative action programs. Just because you can get into Harvard or Yale under an affirmative action program does not mean that you have to go to Harvard or Yale.
In Burry’s words:
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. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. This crisis was such a bona fide 100-year flood that the entire world is still trying to dig out of the mud seven years later. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.
The problem, as he sees it, is debt. Because one of these days we will either have to pay it off or default on it. While many politicians believe that we grow our way out of debt, others, like central bankers--and maybe even Paul Krugman-- believe that we can inflate our way out of it.
The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.