Lending The Ticker

The Big Short’s Michael Burry on disastrous Fed policies; failure of Dodd-Frank

Tells New York Magazine that current financial environment is ‘toxic’

stormy sky ahead

Michael Burry, one of the featured players in both the book and movie “The Big Short,” is thought of as a “soothsayer” who saw the financial crisis coming before anyone else.

As part of the publicity tour for the movie version of The Big Short, Burry spoke with New York Magazine about his views on the run-up to the financial crisis, the aftermath of it, and where things stand now.

In Burry’s view, the government’s biggest post-crisis move, the Dodd-Frank Act, is a failure, and he worries that the current policies of the Federal Reserve are setting up the country’s economy for another crisis.

The entire interview is worth a read, but here’s a selection of some of Burry’s thoughts:

On the government’s failures in the aftermath of the crisis:

The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire.

On the Federal Reserve and the impact of its policies:

The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

On why another financial crisis could be looming:

Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.

Click here to read the whole interview.

[Correction: A previous version of this article incorrectly referred to "The Big Short" as a novel, not a book. The article is now corrected.]

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