Sometimes I muse, “If I were a money manager, how would I invest?” Knowing that governments can be bought, and that governments are essentially power-vendors selling their wares wholesale, I imagine that I would invest in firms with strong ties to government. Buy when they seek government attention (and have the means to get it), sell before they mess up. Based on the available data, I’m relatively confident in this as a long-term strategy. Of course, I could never do this for a living. I can’t think of a more morally crushing career than profiting from the good fortune of firms I despise.
Books like “The Big Short” both strengthen my convictions and cast doubt on them. Given a grossly imperfect market, such as those for bonds, calamity is basically inevitable, as feedback loops try to work out inefficiencies. I loved reading that the big firms had retreated into bonds because the stock market had grown too competitive for them. They couldn’t take the heat. They should have bitten the dust.
But they were the ones who ultimately decided the course of the bailout, precisely because of their size. They bought power at wholesale prices from the state. They made out like bandits, just like I would expect them to.
And yet, for the most part, their stocks have remained low. The market might still be rife with structural inefficiencies, but slowly, slowly, it is learning. It knows these firms shouldn’t be trusted.
In essence, “The Big Short” has only affirmed what I already believed: that only by making markets more efficient can we really affect change. Government’s incentives to perform are awful and perverse, as are those of large firms in inefficient markets. No supervisor, bureaucrat, or regulator will save us from the idiocy of the powerful. Only our own ingenuity can do that.