From the Big Short to the Big Scam

REMEMBER “The Big Short”? The 2010 book by Michael Lewis, made into a 2015 film, told the story of the 2008 global financial crisis by following a handful of investors who were willing to bet on the unthinkable — the proposition that the huge rise in housing prices in the years before the crisis was a bubble, and that many of the seemingly sophisticated financial instruments that helped inflate housing would eventually be revealed as worthless junk.

Why were so few willing to bet against the bubble? A large part of the answer, I’d suggest, was what we might call the incredulity factor — the sheer scale of the mispricing the sceptics claimed to see. Even though there was clear evidence that housing prices were out of line, it was hard to believe they could be that far out of line — that US$6 trillion in real estate wealth would evaporate, that investors in mortgage-backed securities would lose around US$1 trillion. It just didn’t seem plausible that markets, and the conventional wisdom saying that markets were OK, could be that wrong.

But they were. Which brings us to the current state of crypto.