His new novel is Short Squeeze.
About ten days ago I asked him what he was reading. His reply:
I was caught completely off guard by the financial crisis. I don’t care if Nobel Laureates, Chairmen of the Federal Reserve and Harvard economists were also fooled, it still made me feel like a putz. Though I do have several excuses, none very good.Visit Chris Knopf's website.
Around 2006 and 2007, I was astonished by the sharp increase in real estate prices, along with the inflation in the size and appointments of new homes. I wondered how people could possibly afford such excess. Since I’d been out of the mortgage market for almost ten years, I had no idea how easy it had become to borrow massive amounts of money without having to verify your income or net worth. I want to think if I’d known that, and also that millions of these loans had been handed out, I might have been more concerned. I just didn’t know.
I did know that mortgages were being securitized into instruments and subsequently gobbled up by investors around the world. Me and everyone else thought this was a good thing, since it spread the risk. What we didn’t realize was it also spread the exposure to catastrophic levels should those exorbitant housing prices fall. Duh.
I wasn’t just fooled out of ignorance. I also hit a philosophical speed bump. Me and Allen Greenspan. We’d always held the doctrinaire belief that people will always make rational decisions based on their financial self-interest. Not true. They will often make financial decisions based on irrational impulses, denial of the obvious, and entirely misplaced optimism.
I’m generally an optimistic person myself, but I’m also fiscally conservative. So I didn’t play in that over-heated real estate market, but I did invest in the stock market at its peak. I based this behavior on the belief that all the money sloshing around out there would have to find a place to go, and I mistakenly believed it would continue to fuel a solid market. Instead, the Giant Pool of Money (see NPR’s This American Life) was actually the underlying cause of widespread asset deflation. Oops.
Another way my optimism got me was in my disregard for commentators predicting imminent catastrophe. I dislike the attitudes of dystopians, who throughout history have nearly always been proven wrong. I still think they’re mostly full of it, but even a broken clock is right twice a day.
So lately I’ve been researching commentators who aren’t doomsayers, but who also got this one right. I came up with a Yale economist, Robert J. Shiller, who with another big shot academic, George Akerlof, wrote Animal Spirits, which refers to the term John Maynard Keynes used to describe the psychological underpinnings of booms and busts. It’s a good book – somewhat technical, but clearly written and informative.
I’m not getting fooled again. No sir.
Coffee with a canine: Chris Knopf & Sam.
My Book, The Movie: Two Time.
The Page 99 Test: Hard Stop.