Michael Lewis on How the Global Financial Crisis Explains Trump, Crypto, and Everything Else

In the following excerpt, Derek talks to Michael Lewis about the factors that could lead to a financial crash.

Derek Thompson: You have many gifts as a writer, and one of them, I think, is being at the right place at the right time—or maybe more appropriately, being at the wrong place at the right time. You were a young trader on the Salomon Brothers bond desk during the 1987 crash. That experience led to your book Liar’s Poker. You were there to write The Big Short on the housing crash. You decide to tag along with this guy Sam Bankman-Fried just before that company goes infamously belly up. It seems to me like you have seen the human face of financial exuberance up close and personal in so many different ways. Do bubbles and financial crashes share some fundamental underlying characteristic that you’ve sussed out? Or are they like Tolstoy’s unhappy families, where each is unhappy in its own way, and every bubble crash is really its own organism, its own specimen?

Michael Lewis: So each is its own specimen. So I mean, if you drill down far enough, you can find things distinctive about it. And I did this exercise just recently with Andrew Ross Sorkin, who has written a book about the crash of ’29. Like, just pretend these are two pictures, one by Rubens, one by Rembrandt, the 1929 crash and the 2008 crash: Compare and contrast. But you can find things in common. What is in common? What they all seem to have in common is risk either gets misunderstood or hidden. The financial system is always trying to hide risk. It’s a funny situation, right? Because it’s put on earth to expose it and price it accurately, but in fact it’s really valuable to be able to hide it. And so that’s one thing that I think goes on before every financial crisis.

You’re asking me a question I hadn’t actually thought about, but I wonder if before every financial crisis, incentives get screwed up. Like, people are effectively paid to do really dumb things. They’re paid in the short term to ignore longer-term risks. That was certainly true. That was fuel for what happened inside the big banks; it was fuel for what happened inside the banks’ lending operations back before the 1929 crash. So maybe that’s partly it, too, that somehow the financial system, whatever it is at the time, gets itself twisted into this place where people are doing really well for themselves creating what will be, obviously, in the end, a catastrophe.

But I don’t know; I certainly wouldn’t pretend to be able to predict when these things are going to happen. And I would go one step further and say, anybody who tells you that they know when the crisis is coming, you should just not listen to them about anything. These are unpredictable events. Like, characters in The Big Short, they knew that there were these problems, and they knew that there was this really positive expected value trade to do. None of them would’ve pretended to know when this is going to happen, maybe with one slight exception. So it’s just a foolish game to pretend that these things are so knowable they’re predictable.

Thompson: I want to return to one thing you said, which is that financial crises and bubbles tend to have this quality of the protagonists are hiding something. And what I thought of is that as individuals, we hide our misdeeds, and we call it shame. But as companies, we sometimes hide our bad bets, and we call it finance. And in many ways, the people who are best at sussing out these bubbles are those who are best at sussing out what is essentially like corporate shame.

I was having a conversation with someone recently about fears of artificial intelligence being a bubble, which I want to get your mind on in just a second. And they said, “What really scares me is that these companies often aren’t building the data centers themselves. They’re creating special purpose vehicles. They’re creating this black box, and they’re putting money in the black box, and private capital is putting money in the black box. And that black box is actually going out and building the data center, but they’re trying to hide this stuff off their balance sheet. That’s what makes me scared.” And so again, it’s sort of like, you know, you’re in trouble. You know the system understands itself to be flirting with danger when it begins to hide what they’re doing.

Lewis: Hide things. That’s right. And this thought fleeted across my mind a few days ago, so I’ll voice it since it’s a podcast and it’s for voicing fleeting thoughts. But think about the whole incentive issue right now, on a big scale. I think for the first time in history, we have a president—it’s not the first time in history the president wants to seize control of the money supply, right? That’s happened before. It hasn’t maybe succeeded all that well, but that’s not an original ambition. But we have a president whose personal family fortunes are mostly tied now to crypto. And what’s the way you make crypto go up? You debase the dollar; you create chaos. So we have someone, in a very powerful position, who’s got an incentive, a personal financial incentive, to create a financial crisis, to create, especially a debasing-the-dollar kind of financial crisis.

That’s just weird. Whatever happens, it’s possible we will look back and say, “Well, that was odd that we allowed the president not just to get a hold of the money supply but to get a hold of at the same time … 5 billion Bitcoin, or whatever he’s got. And that he could make the Bitcoin go up just by screwing with the money supply.” There’s an incentive that’s big. And maybe he would never think like that, but as a basic matter of incentives, the incentive structure has changed, and nobody’s really pointed it out. So you’ve got to be really careful about the incentives because they do tend to lead to behavior.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guest: Michael Lewis
Producers: Devon Baroldi and Kaya McMullen