I think there will be three turn-of-the-century trends assigned roughly equal weight: rampant mis-regulation and mis-manipulation (Fed-subsidized credit, government/GSE-subsidized mortgages, the quasi-official status of credit ratings), a short-termist fad in investment, and America’s illusion of invincibility.

And I’m quite sure that 2008 won’t be counted as the end of any of those three trends. Probably not even the apex.

And I have to disagree with Christo, even though I agree that Fed-subsidized credit (let’s call it what it is) was the most ultimate cause of the housing bubble. Lewis’ book was as advertised a story about “The Big Short” at the end of the bubble. Thus its background focuses on the history of the instruments that would be shorted and the people who developed, sold, bought and shorted them.

I applaud Lewis for trying to tell a true story of a major buyer of CDOs. I can’t say personally if he told it 100% accurately, but it rings true enough. Maybe all it boils down to is a basically anecdotal story of a particularly arrogant dumb cluck (go ahead and sue me, Wing, I dare you).

Sure, there will always be plenty of dumb clucks. The systemic failures and perverse incentives that led investors as a group to mis-invest are more important, of course. But hubris and illusions of invincibility were a big part of the story.

Specifically, Lewis’ book feeds into the idea that there was something institutionally novel about the mechanisms behind the real estate bubble of 2003-2007: that the doomsday machinbery involved a shadow banking system, dubious off-balance sheet entities, etc. Lewis’ book, by focusing on entities like Harding Advisory, may have contributed to the broader error.

It is an error, because in outline that crisis was created by very familiar mechanisms. The following ingredients were key:

1) Absurdly easy-credit policy at the Fed
2) Rest of the world (including China!) continues to treat U.S. dollar as the pseudo-gold standard, enabling that absurdly easy-credit policy, and
3) Easy money makes the big investment banks sloppy about the risks they take — risk managers get re-assigned to closets, etc.

The truth about ingrediant (3) was hidden in plain sight. It was, in large part, right there on the balance sheets. They didn’t really need fronting by Chau and Harding Advisory to dig themselves (and Main Street) into this hole. Although he may have helped bring a shovel or two to the construction site.

In those cases the bar for proving libel is high – you have to show the writer/publisher willfully lied or was totally indifferent to the accuracy of the statement. Without that defense, Lewis’ case gets tougher to win.

Now I never heard of Chau before yesterday, so that might be hard to prove. I guess Lewis’ lawyers can try to show that Chau was already famous in his profession (rather than famous throughout the U.S.)