Friday, September 17, 2010

Fed Economists Refute Lewis' Book: The Big Short

Paul Willen, research economist and policy adviser at the Boston Fed, with Boston Fed economist Christopher Foote and Atlanta Fed economist Kris Gerardi, refute the claims made in the best selling book, "The Big Short" by Michael Lewis:
In this post, we focus on the logic of the "sure thing" claim, which is that the subprime bears were exploiting the ignorance of the subprime bulls. The idea that subprime bulls were ignorant is central to the thesis of the book, because it explains both why investors made such huge errors and why it was possible for the subprime bears to exploit, with little risk, the collapse of the mortgage market.

Lewis argues that the ignorance of the subprime bulls resulted from a combination of laziness and obfuscation by issuers of the securities they were buying. We argue, however, that the evidence, including some in the book itself, shows this claim to be patently incorrect. Issuers provided staggering amounts of information about mortgage securities and there was a whole industry of analysts on Wall Street who pored over that data and published literally thousands of reports.
Read "A closer look at Michael Lewis's 'The Big Short' ", the complete Federal Reserve Bank of Atlanta article here.

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