Some Views on The Big Short

The Big Short is Michael Lewis' book on the 2008 housing and collateral bond crisis. It is an astonishing story about the failure of regulations, common sense and good will to oversee a system befouled with political stupidity, staggering corruption and outright criminality. The movie of the same name is out. It seems like a hard assignment because part of Lewis' talent is making the arcane financial world clear and, despite the danger of the problem, there was little personal drama; much of the conflict was in huge corporate financial positions. But there were some minds at work, mostly on the side that did not believe in the economic model of the time. And much of the problem they encountered was internal; they were not sure that so many people could be so wrong or corrupt and they, alone, had discovered it. Lewis' story was like a mystery where several thoughtful and suspicious guys were examining and trying to diagnose a gigantic alien beast which might--or might not--be ill.

In essence the problem was that the entire financial community wanted to encourage mortgages (for numerous, often selfish reasons), those grading the quality of the mortgages were foolish, neglectful and sometimes compromised, the regulators did not regulate at all--as anyone knowing anything about Madoff can believe--, and the intermediaries gleefully cut the financial throats of everyone who would volunteer from the home buyers to the mortgage buyers to the underwriters. 

When there is a problem in the United States, there may be no effort to solve it but there usually is a tremendous effort to capitalize on it and to blame people. So it is with this near-death economic disaster that ruined so many people's lives. Little has changed. Banks were made whole but no defrauded investor has been rescued, no bright eyed hero has arrived to help protect us from future such disgraceful behavior, no dishonest or grossly unethical participant has been pilloried. But plenty of criticisms have washed up. Here are several summaries with worthwhile links:

 

From Krugman's NYT column:
While the movie gets the essentials of the financial crisis right, the true story of what happened is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view that the money manager and blogger Barry Ritholtz calls the Big Lie. It’s a view that places all the blame for the financial crisis on — you guessed it — too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor. Never mind that the supposed evidence for this view has been thoroughly debunked, or that before the crisis some of these same hired guns attacked those agencies not for lending too much to the poor, but for not lending enough. If the historical record runs counter to what powerful interests want you to believe, well, history will just have to be rewritten. And constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.

Sure enough, “The Big Short” has already been the subject of vitriolic attacks in Murdoch-controlled newspapers; if the movie is a commercial success and/or wins awards, expect to see much more.

The thing to remember, when you see such attacks, is why they’re taking place. The truth is that the people who made “The Big Short” should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let’s hope that their fears are justified.

And Epstein's letter to the editor in the NYT
To the Editor:
In his column on the film, “The Big Short” (“‘The Big Short,’ Housing Bubbles and Retold Lies,” Dec. 18), Paul Krugman declares that the housing bubble “was largely inflated via opaque financial schemes that in many cases amounted to outright fraud.”
This causal analysis is directly contradicted by an alternative view previously expressed in the New York Times: that the housing bubble was largely inflated by policies of the Federal Reserve.
“To fight this recession,” wrote a New York Times columnist on Aug. 2, 2002, “the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
In a blog on that column posted on June 17, 2009, this same columnist observed: “What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”
The columnist who wrote those words: Paul Krugman
Gene Epstein
Economics and Books Editor
Barron’s

 

The battle will rage. And all the positions will be ossified and one-sided. But some things in the culture must be coming clear to people: In any national debate there is no altruism involved. Ever. In fact the pious are usually the worst. Any altruism that exists is only on the individual level, the person to person interface by the optimistic recruit. But that in no way reflects the infrastructure. Positions, movements, policies, theories, overviews by leaders, politicians, academics, ---any hierarchy---are self-serving, rapacious, grasping and as benevolent as a black hole.

In the now famous Rolling Stone magazine article in 2009 by Matt Taibbi, Goldman Sachs, the world’s most powerful investment bank, is referred to as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

It ain't just Goldman Sachs.