The sputtering engine of capitalism

MICHAEL LEWIS (TABITHA SOREN)

In 1988, Michael Lewis left the trading floor of Salomon Brothers to become a writer. "Liar's Poker," his memoir of life in the "testosterone tank" of Wall Street, brilliantly conveyed the craziness of that world, and books like "Moneyball" and "The New New Thing" followed. As editor of "Panic: The Story of Modern Financial Insanity" (Norton, $27.95), Lewis selected over 50 articles or book extracts (including seven of his own) that illuminate the financial panics of 1987, '99, and the present. A native of New Orleans, Lewis is currently working on a book about that city and Hurricane Katrina. He spoke en route to Iceland.

Q. Are you visiting Iceland to view the wreckage?

A. You never know what you'll find, but it's really interesting to me to see the tentacles of this financial collapse. I imagine it will be a study in rapid rise and fall, and I'm curious to see how people deal with this emotionally. In Iceland it seems to be beyond panic. A recent poll apparently showed one-third of the population thinking of leaving. That's incredible.

Q. Is the panic you describe a crisis of faith?

A. I think that's what we're going through with the government's trying to re-establish confidence in a system in which it's very hard to feel confident. But telling people to feel confident when they don't often has the reverse effect. And when faith leaves the system as dramatically as it has in this crisis, banks everywhere are totally vulnerable.

Q. You reveal that this financial system has its secret priesthood . . .

A. . . . and that the priests didn't know what they were doing. They deluded themselves by thinking that they understood the businesses they were running when they didn't; that they understood the risks involved when they didn't. I think we need to get away from the priesthood. I mean, in the [Alan] Greenspan era we had a guy who was chairman of the Federal Reserve whom everyone thought was great because they didn't understand him. It should be the reverse: If I don't understand you, there's a problem.

Q. What can past panics tell us about this one?

A. That we failed to learn lessons that were there in plain sight. We should have learned from the collapse of Long Term Capital Management that overleveraged institutions filled with black-box investments are highly vulnerable. To allow essentially all the major investment banks in New York to mimic the structure of Long Term Capital Management was insane. We should have learned that the financial world was so interconnected we couldn't afford to have one of these entities go down.

Q. How is this crash different?

A. It's so huge. It's the first crash in the modern era to have massive, real consequences, and it's going to cause a complete rethinking of the role of money and finance in American life. The ability of the Federal Reserve to mask the effects of past crises created such complacency that now we have a problem that is too big for the government to solve.

Q. But many of the writers you include in this book saw it coming.

A. It's one thing for a writer to see it coming; it's another to bet money on one's foresight. I just wrote a piece about a hedge-fund manager who set himself up to do very well if the subprime mortgage collapsed. He thought, three years ago, that Wall Street was creating a catastrophe. A handful of people put money on it coming. So it's wrong to say that nobody saw it coming. It's truer to say that the big institutions had arranged themselves in such a way that they couldn't help but ignore what was about to happen. Everybody's seeming interest was in keeping the machine running.

Q. As a financial writer, is there a central fact that you want the general reader to grasp?

A. Yes. That it is not a virtue not to be able to understand what someone is telling you about money. If they make it sound complicated, that is not a sign of their intelligence or competence. It means you're being bamboozled. The public needs to be better educated about finance so it doesn't hand over $700 billion to a treasury secretary who doesn't know what he's going to do with it.

Q. Where is capitalism today?

A. Well, the economist Joseph Schumpeter spoke of "creative destruction" in late-stage capitalism, and there was a lot of wisdom in that. We now have creative self-destruction as the engine of capitalism. In a narrow way, I think we've come to the end of something big, that the decline began in the early '80s and is rooted in America's love affair with debt - at every level of society - and in Wall Street finding increasingly arcane ways to exploit this for profit.

Anna Mundow is a correspondent for the Irish Times. She can be reached via e-mail at ama1668@hotmail.com.