I’ve just finished reading Michael Lewis’ The Big Short. I’m a big Michael Lewis fan so I’m not surprised at how much I enjoyed it (though Lewis’ Moneyball is still at the top of the list for me, especially for anyone who’s interested in using data to make high-stakes decisions – I know you’re out there!!). If you care about markets and the workings of the global economy, I’d say you should run out and read both The Big Short and Too Big to Fail by Andrew Ross Sorkin. Yes, both tell like soap operas, but I know I wouldn’t have slogged through all the subprime bond arcana without a good story and a healthy crop of heroes and villains.
The dispiriting picture Lewis paints is one of huge firms who make the rules by which they make money, and nearly impotent oversight bodies (the ratings agencies) who abdicated responsibility. So, for example, in the run-up to the subprime mortgage crisis, the ratings agencies knew much less than Wall Street (whose main players, in turn, knew much less than they should have) when rating subprime paper; Wall Street firms primed the pump with stories of “low-risk” and “uncorrelated” assets (CDOs) that, as we all now know, were incredibly risky and incredibly correlated; and for many years, Wall Street firms seemed to have enough power over information and prices to create fictitious profits that led to real bonuses the likes of which we’ve never seen.
What has struck me as I follow the SKS debate and then end my days reading about synthetic subprime mortgage bond-backed CDOs, is this: if we are going to forge a new kind of capitalism, one that helps create a world beyond poverty and one that leverages markets but is not beholden to them, the we are going to have to become exceptionally adept at understanding two highly sophisticated, often opaque markets:
- The economy of the poor (rural and urban both), who manage money and risk and make sophisticated tradeoffs every day about the simple act of survival (for which Portfolios of the Poor is in my mind the right starting point, but then we need to spend real time in these markets to really understand much of anything);
- The economy of the rich, not just to understand how capital moves (though that’s important), but also to understand what “real markets”, the most sophisticated markets in the world, really look like.
More often than not, I think we fall into the trap of grossly oversimplifying both of these markets – we paint the same pictures that were drawn for us in Microeconomic textbooks and imagine stylized, efficient markets with the greater good, magically and invisibly, created for all. Yet the more I understand how the most sophisticated markets function, the less convinced I am by stories that end with “and then market actors will come in and scale and efficiency will follow.”
I don’t know what the SKS IPO means. No doubt it is an important and potentially very positive step. We want people to be competing for the business of poor borrowers (and, hopefully, eventually savers). We want competition to bring prices down and we want the best organizations to have the capital on hand to scale. But it also could be that microfinance is the next subprime mortgage crisis, an edifice built on the backs of a different set of poor people (this time in the developing world). If that is the case then one possible outcome is that some people will get very rich and others – the most vulnerable – will end up holding the bag. Most likely the answer is somewhere in between, and I believe to steer us towards the most positive outcomes we need to sharpen our pencils and bring more sophistication to how we characterize markets for the very rich and the very poor, since increasingly these two will intersect in the coming years and become increasingly interconnected.
My ultimate dream is that, armed with a clear-eyed, sophisticated understanding of how both of these markets really work, we will find a way to bring in capital with a purpose from a class of investors that sees economic return as part of a larger set of returns that they create with their capital. (This may and probably will involve lower economic return that incorporates higher social return). It’s going to need to be both/and (social/economic), not either/or.