Today’s Financial Times articles: “Popcorn and Wine at ‘Inside Job’” (Jan 15, 2011) “Hollywood’s Credit Crunched” (Oct 9, 2010)
If you haven’t seen “Inside Job”, you must. As an analysis of the crisis, it just scratches the surface, but even those scratches do immense public service by arousing us to dig deeper and find out more.
It is a beautifully made film, and that is no small part of its appeal. The soaring opening sequence on Iceland tells you immediately that you are in the hands of an artist, and by the time the camera zooms in on Manhattan, you are hooked. Suspending disbelief, you give yourself over to the magic of the theater.
All the players are here, arrayed as a “securitization food chain”, with cameo appearances carefully chosen to give each link in the chain a human face. The storyline that holds the movie together, however, is not so much about the forging and failure of this interlinked chain, as the economist in me would want. Rather it is at heart a morality tale; it is a movie.
The opening sequence on Iceland sets the frame. It presents a tale of a few rapacious bankers gaining control of three quite ordinary banks, using them as vehicles for their own speculative schemes and profligate appetites, borrowing vast sums from depositors outside Iceland and then, when their schemes inevitably collapse, leaving the innocent Icelandic public holding the bag. Who is accountable? The bankers, of course, but also the regulators and politicians who let them get away with it.
The rest of the movie puts this same frame on the much larger U.S. financial crisis. Here the storyline is about the expansion of (predatory) sub-prime lending that fueled a speculative housing bubble that inevitably collapsed.
Cast as the innocents are the borrowers, but also the ultimate lenders—two public sector pension funds are mentioned. Cast as the rapacious bankers are the investment bankers at Lehman and Goldman Sachs. Regulators and politicians let them get away with it, helped along by academics preaching the gospel of deregulation.
Make no mistake, the ultimate temptress in this morality tale is money itself. Rapacious bankers are with us always, the movie seems to say, but we don’t have to let them loose to work their schemes, much less egg them on with outrageous and one-sided compensation schemes.
Similarly regulators, politicians, and academics can regularly be found who see only virtue in the unfettered search for profit, but there are also always more cautionary voices in each of these realms, and we don’t have to give the megaphone always to ideas that have money behind them. The revolving door between financial industry and financial regulation may or may not be an example of direct corruption, but it can hardly help but distort the conversation.
From one point of view, this is a movie about how money corrupted academia; no one will soon forget the cringe-making scenes with famous Harvard and Columbia faculty. But from another point of view the movie is about how, notwithstanding the distortions of money, there were and are plenty of voices speaking on the other side, from outside as well as inside the academy: Raghuram Rajan and Nouriel Roubini, Brooksley Borne and Frank Partnoy, Charles Morris and George Soros, Christine Lagarde and Dominique Strauss-Kahn. Even the FBI comes in for praise, for early and regular warning of widespread mortgage fraud!
We are left with the implication that, were it not for the corruption of money, these alternative voices would have been heeded, and we could have avoided the crisis. I am not so sure.
The crisis had (and has) lots of moving parts, and those who raised concerns were typically focusing on one or two parts of a much larger system that was very imperfectly understood. Even today, it is not widely understood how a simple housing bubble, in a narrow segment of the market, nearly brought down the entire financial system, and the movie does not really help in that regard.
There is talk in the movie about bank leverage, and about credit-default swap side bets on sub-prime that multiplied losses, but the mechanisms for amplification of a subprime crisis into a global financial crisis are left unexplored. We hear nothing about the exposure of European banks, nothing about the role of the Fed in putting a floor under the crisis, nothing about global demand for dollar reserves, and nothing about the shadow banking system that sprang up to meet that demand.
Moral outrage is fully appropriate. What we need now is to channel that outrage into financial analysis, from top to bottom, and into financial reform, also from top to bottom.