In his book and movie, The Big Short, Michael Lewis tells the story of a few intelligent and courageous investors that saw what no one else wanted to see. Instead of turning a blind eye to absurdity, they did their homework. What they quickly found was many subprime loans were likely to default. These investors were laughed at by Wall Street's "best and brightest" simply for betting on an obvious truth.

Myopia and fat profits clouded the ability of many investment professionals to see the housing bubble. Worse, well-educated PhDs at the Fed, charged with preventing financial instability, had the same blind spot. 

Now, a decade later, a much larger problem is brewing. Once again, those on Wall Street and the Fed do not see the debt elephant in the room. Maybe worse, they see it but perpetuating the problem serves their interests best.

Spotting The Elephant

In 2008 the sub-prime mortgage market crashed for several reasons. Chief of them, borrowers were ill-equipped to make mortgage payments if interest rates rose or incomes got compromised. Equally problematic, the collateral (home prices) backing the loans were grossly overvalued.