Sunday, October 9, 2011

Michael Burry Analyzes America's Financial Collapse

What went wrong?

With America, but most especially with the American financial system.

Many have noticed that I am not the best at guiding you through the ongoing financial crisis.

Michael Burry must count as one who is. A former physician and hedge fund manager, Burry was among the first to foresee the catastrophe that befell us in 2008. His vision of our future is none too sanguine today.

Michael Lewis made him a household name in his book, The Big Short:Inside the Doomsday Machine.

Now, Burry is offering an overview of the crisis, how we got to where we are and what needs to be done.

His article, “Missteps to Mayhem” was just published in “Vanderbilt Magazine.” In it Burry reworks a lecture he gave at the University last April.

It is as good an analysis of what went wrong as I have seen, so I am more than happy to link it.

Burry opens: “In predicting when and how America’s financial collapse would occur, my focus was on the growing importance of the housing sector, the actions of our government, and the response of the private sector. This was not simply a case in which a few early adopters made a lot of money or a few venture capitalists acted badly. The entire economy—consumer spending, jobs, securities market—all depended on home price appreciation.

“The amount and types of leverage, the generations-old assumption that housing prices always went up, and broad societal participation in home ownership (with greater than 60 percent of Americans owning a home) all called out to me. Soon I would see financial Armageddon with housing as its trigger point.”

It’s well worth a read.

1 comment:

JP said...

Nice article. I like the nod to fraud. The bezzle always expands during a true credit bubble.

"Ominously, fraud jumped. The point at which the provision of credit was most lax, in my mind, would mark the point of maximal price in the asset. I imagined the top end of the housing market would be marked by a climate in which borrowers of subprime quality were enticed to buy with teaser-rate monthly payments near zero. I was very aware lenders would take this to the nth degree. Banks could sell loans they did not want to keep through Wall Street, to investors who were ravenous for yield."