Michael Lewis’s new article about Germany is getting some play (although Kevin Drum hates it), so I figured this was a good time to dust off and extend some notes I wrote after I read Lewis’s The Big Short. After some general reflections about the financial crisis, I deal specifically with the Germans at the end.

The Big Short tells the story of the financial crisis by following a few individuals who saw it coming early and placed bets against the edifice of home mortgage-based structured finance. This personalization has clear storytelling benefits, but it tends to occlude the structural basis of the entire system; nonetheless, it’s possible to back out a more interesting institutional story from the book.

Throughout the book there is an implicit tension between two ways of seeing the crisis. This tension turns on the distinction between idiots and crooks — or to put it another way, between rationality and madness. One popular interpretation of the crisis, and of Lewis’s book, is that the explosion of sub-prime lending and securitization was the result of mass stupidity, and that huge numbers of people simply failed to understand or account for the incredible financial risks they were taking. This is basically the approach Ezra Klein takes when he quotes Larry Summers’ famous remark that “there are idiots” and concludes that the crisis was a consequence of human weakness and error in the context of a system with few regulatory restraints. He reiterated this claim later, in a post criticizing the documentary Inside Job.