“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
This is how The Big Short, one of the most successful and profitable movies about the world financial crisis of 2007 – 2008 according to the Financial Times, presents its opening scene. This thought-provoking quote used first by the famous American writer and humorist Mark Twain, shares the following perspective about the daily decision-making process of any individual: people tend to believe that “the unknown” is the main cause of trouble since it is unpredictable, and, hence, they mistakenly tend to trust their own opinions as facts.
Due to this common wrong behavior, in the 2000s banks, governments, and political authorities blindly accepted to keep in motion the never-ending profit-making machine of mortgage-backed securities (MBS) with the illusion of being in a new ‘Gold Rush’ era. Similar to the 19th-century gold diggers, people abandoned their morality in favor of an irrational thirst for profit. Nevertheless, sooner or later the ‘golden’ dream ended and the entire global financial system experienced a ‘crash’ in 2007-2008.
The melting of the economy caused by this catastrophe is succesfully pictured through movie media. Indeed, a wide range of film directors took advantage of this mass media device to help the audience become familiar and engage with such a complex topic.
Three movies, three different perspectives on the Global Financial Crisis
Inside Job: the government and bank’s exchange of favors through Deregulation
The 2010 Oscar-winning documentary movie Inside Job, directed by Charles Ferguson, depicts the political system which supported banks to boost their earnings before the devastating financial collapse. According to what the narrator (portrayed by Matt Damon) says, there was a cause-effect relationship between economic deregulation and the crisis. The former is associated with the neoliberalist concept of Laissez-faire of the 19th-20th century economist F. A Von Hayek: leave room to privatization and the market as it operates autonomously for the common good and avoid any form of government intervention. In this way, companies and their clients can be free to make riskier decisions. Sticking to this financial strategy, in 1981, US President Ronald Reagan promoted 30 years of financial deregulation, aiming at restoring the country’s economic prosperity, which was prosecuted by Clinton and Bush too.
However, was deregulation helpful to expand the market? The answer to this question can be provided by taking into consideration the example of Iceland, illustrated at the very beginning of the movie. In 2000, the Iceland government imposed a deregulation policy, allowing the liberalization of multinational firms (e.g. Alcoa) and the privatization of the three main local banks. The result was unexpected, (or, instead, could we say ‘predictable’?) an exponential increase in the country’s debt, a massive borrowing of 120 billion dollars from the above-mentioned three banks, between the years 2000 and 2007 approximately. As soon as the international monetary market was blocked in 2007, the banks were not able to repay their creditors and, thus, they failed.
Overall, this type of policy enhanced the social inequalities and hastened the gradual disappearance of the American Dream. The more the bank managers, CEOs, and traders took risky deals, the higher became their rewards and the economic disparity between the élite and the rest of society. As a result, ordinary people were forced to compensate for such economic imbalance and to satisfy their needs as consumers by going into debt. And banks expanded their mortgage and loan offers to new categories of the public that were not likely to repay their debt over time, in the form of ‘subprime mortgages’.
Therefore, the surreal constant accumulation of profit by banks relied on a rising level of insolvency and, so, on private debt. A massive bubble took control of the entire financial market. It is then legitimate to ask who let this happen. The answer is very simple: Inside Job. Indeed, the collusion between the companies and the government (the vigilant) made them both turn a blind eye to the predictable economic breakdown and follow the flow of the predominant optimism that governed the mind of enterprises.
The Big Short: the unethical infinite process of CDO’s creation
The Big Short (2015), directed by Adam McKay, opens up with an introduction to Lewis Ranieri, the well-known bond trader of Salomon Brothers, who launched the most brilliant invention in 1979: the mortgage-backed securities (MBS). These were tradable financial assets transformed into securities through the process called ‘securitization’ and they were secured by a single mortgage or group of mortgages. Rating agencies assigned the highest possible rating, the ‘triple A’, to mortgage-backed securities as they depended on the most solid asset, which was the brick, synecdoche for ‘house’. To clarify, AAA-rated bonds are generally the safest with the lowest risk of default.
Ordinary banks saw Ranieri’s idea as the perfect method to enlarge their profits and they began to convert mortgages into MBS. This securitization food chain, as it is referred to in Inside Job, further expanded as soon as investment banks purchased mortgages from lenders and combined different types of mortgages and loans to create even more complex securities defined as ‘CDOs’ (Collateralized Debt Obligation).
The world-famous chef Anthony Bourdain tries to elucidate this complex topic through the metaphor of the ‘fish soup’ in a specific clip of the movie. When a chef has leftovers of fresh fish, he can recycle them into a seafood stew and cook a fish soup. Similarly, investment banks can collect all the unsold BB- or BBB-rated, so way riskier, MBS and they can create a ‘whole new thing’, which is a CDO.
The creation of CDOs was just one of the many traces of the Securitization ‘fever’. The US issue of CDOs skyrocketed between 2002 and 2006, from 25 billion dollars to more than 2000 billion dollars, respectively. Banks and traders kept selling MBS to keep making money for the sake of making even more money, as the political economist Max Weber would suggest. As a result, the Securitization cycle had to keep working infinitely. More and more mortgages had to be converted into securities and sold to any member of the public, eventually to landlords’ dogs too:
“I’m looking for Harvey Humpsey.”
“You want my landlord’s dog?”
“Your landlord filled out his mortgage application using his dog’s name?”
Despite the issuance of ‘Ninja loans’ (mortgages sold to the ‘No Income, No Job, No Assets’ category of the public), the prices of MBS kept going up steadily because the housing market was considered, by definition, to be the most stable. Ranieri was on the same side of the argument, pronouncing at the very beginning: “Who the hell does not pay their mortgages?”.
On the other hand, some cautious and sensible individuals, such as the hedge fund manager Michael Burry, became aware of the actual worrying rise of the level of insolvency on mortgages, which was occurring behind the apparent ‘flourishing’ of the MBS market. In addition, this disastrous situation was hidden by the same rating agencies, who were paid handsomely by the institutions they had to evaluate to assign AAA-rating to the CDOs issued by the latter. Hence, Burry, together with the other main protagonists of the movie, learned about this major bubble and speculated against the housing market, in other words, against the entire US financial economy. This ‘Big Short’ could be associated with betting against Roger Federer winning at the Wimbledon Tournament. The public would indubitably state that this gamble is foolish. But what if Novak Đoković defeats the ‘King of Grass’ at Wimbledon, like in 2019?
Well, Michael Burry was right and he won the risky deal, earning 489% out of its entire hedge fund, corresponding to a total profit of $2.69 billion. Now, would you still consider Ranieri as being a good innovator?
Too big to fail: the annoying ‘inconvenience’ of saving the US economy
How did the US political authorities react just after the Stock Market Crash on September 29th of 2008? This is exactly what Too Big to Fail (2011), directed by Curtis Hanson, is about. Indeed, this movie is a recap of the shock experienced by the two major characters: the Fed president, Ben Bernanke, and the Secretary of the Treasury, Henry ‘Hank’ Paulson.
Just after the mentioned crash, the entire international monetary system blocked the circulation of liquidity and the effect of the meltdown was way bigger than expected. Even companies that were not operating in the financial market, such as General Electric Company, a company producing engines and light bulbs, were hit by the housing bubble explosion and they could not finance their day-to-day operations. No one could pay anyone anymore.
To recover from this universal ‘trauma’, Bernanke and Paulson came up with a drastic solution: the complete abandonment of the deregulation policy, as the advocate of the crisis, and the exceptional government intervention. Thus, Bernanke and Paulson ran away from Hayek’s neoliberalism and they embraced the Keynesian model, by necessarily injecting government capital inside the biggest banks. This plan of action was aimed at restoring the original trust in the banks and at eliminating the disruption of credit, which, according to Paulson, was toxic for the healthy growth of the economy.
The savings program installed by Bernanke and Paulson cost more than the Louisiana purchase, the Marshall Plan, the Korean War, the space race, the Vietnam War, and the Iraq War altogether.
Overall, the movie criticizes political authorities that permitted first the toxic growth and the successive failure of giants, such as Lehman Brothers, due to the Stock Market crash. These companies were ‘too big to fail’. In other words, the collapse of one of them would have entailed its repercussions on the entire global economic system, with a multiplied effect. As the author of The Big Short book Michael Lewis states:
“The problem wasn’t that Lehman Brothers had been allowed to fail. The problem was that Lehman Brothers had been allowed to succeed.”
All things considered…
More than a decade has passed since the world economy went through one of its worst downward trends in history. Its effects were still palpable on a day-to-day basis even after 10 years: the US unemployment rate was still too high in 2017. By December 2017, the male and female unemployment rate dropped to 4.1 and 4.0 percent respectively. Also, a huge biased distribution of income still prevents the middle-class from being fully restored.
Personally speaking, there is no doubt about the seriousness of the Global Financial Crisis. The recovery from it is still on the way and it has worsened recently owing to the Covid-19 economic recession.
Many greedy and privileged individuals took advantage of the ‘flourishing’ US housing market to earn plump bonuses, but it is worthwhile pointing out that millions of people lost their homes, their jobs, their savings and, generally, their hope for a brighter future. To quote the mentor Ben Rickert in The Big Short:
If we are right, people lose homes. People lose jobs. People lose retirement savings, people lose pensions. You know what I hate about fucking banking? It reduces people to numbers. Here’s a number – every 1% unemployment goes up, 40,000 people die, did you know that?
Overall, what could have been done to avoid this crisis? Well, according to my way of thinking, individuals will never act with a complete rational behavior. No one acts as a homo oeconomicus and emotions shape decision-making. The irresponsible behavior of traders driven by avidity could not have been kept out. Nonetheless, the 2007-2008 crisis could have been, at least, foreseen and the US government could have stopped the neoliberalist policy, which exacerbated the delicate equilibrium of the financial market.
- Prendi i soldi e scappa. La finanzia spiegata con il cinema by Marco Onado; Editori Laterza, 2018
- Movie media: Inside Job (2010), The Big Short (2015), Too big to fail (2011)
- Letters appeared in The Times of London (Oct. 17 and Oct. 19, 1932), written by John Maynard Keynes and F. A. Von Hayek (https://www.csmonitor.com/Business/ThinkMarkets/2010/0701/Keynes-vs.-Hayek-The-great-debate-continues)