Tuesday, March 15, 2011

Inside Job burns with righteous moral fury

Probably the most devastating segment in Inside Job comes in the last third when it discusses the lucrative off-the-books consulting careers enjoyed by many (most?) major academic economists. Economists from top schools are paid not just for speaking engagements but actually to write (or sign their name to) actual economic studies pointing to a client's desired result, and they never even disclose it because there's no rule at Harvard or Princeton or wherever that says they need to.

In an interview with John Campbell, chairman of the Harvard Economics Department, filmmaker Charles Ferguson uses this analogy:
Ferguson: A medical researcher writes an article, saying 'To treat this disease, you should prescribe this drug. Turns out, doctor makes 80 percent of personal income from the manufacturer of this drug. Does that bother you?

Campbell: I think it's certainly important to disclose the, um. The, um. Well, I think that's also a little different from cases that we're talking about here because, um. Um.

So I am late to seeing Inside Job, but I am guessing that I am not the only one who waited for it to come to Netflix, so a few thoughts:
  • The film is suffused with righteous moral fury, but also intellectual rigor. It's the best kind of polemic, and seriously I do hope Michael Moore and Davis Guggenheim were taking notes.

  • Part of the reason that the exchange above, like the entire segment on the corruption of academic economics departments, is so effective is because it really does present some new information. Somehow cornering a big-time financial services lobbyist with questions about CEO pay and lobbying dollars spent, which the film also does, is just not as effective. Maybe it's not as shocking or satisfying because Crooked Lobbyist is a character out of central casting, and besides, the lobbying guy knows exactly what he's doing in the film: He's there to provide slick, weaselly answers to pointed questions about his clients. The academic guys, by contrast, are so arrogant as to actually be shocked that they're even being questioned in this way.

  • It seems like most of the movie is made out of airplane shots of the outside of buildings, and yet it is still visually pretty great. I think they must've shot their Manhattan cityscapes early in the morning or right at dusk, because the light is terrific.

  • I think the film's argument is correct and well-constructed. The housing bubble was driven by Wall Street instruments and the crash was the result of a completely deregulated industry grown to monstrous proportions. But still this one, nagging thing: Ordinary people benefited from the housing bubble, and while it was going on they loved the housing bubble. Remember home equity loans? Remember the concept of home-as-retirement-fund? Remember the television program "Flip This House"?

    Ferguson talks to exactly one homeowner, a Latina woman whose family was taken advantage of by rapacious, criminal predatory lenders. But there were hundreds of thousands of others who bought into the bogus idea that housing prices always go up and benefited from it.***
It is satisfying to see some of the people who were directly responsible for the bad economic theory that set the table for the crisis cornered on film. And it's telling to see the names of many, many others flashed across the screen with the perfunctory "declined to be interviewed for this film."

Of the questions that arise out of the 2008 collapse, here are some: Should more people have seen the 2008 collapse coming? Are we likely to see another cycle of bubble and collapse? Is last year's financial reform law likely to prevent the next crisis? With the swollen size of the financial services industry, is the government structurally likely to successfully recognize and head off such an event?

Inside Job asks these questions, or at least touches on them. But it seems to me that its main question is a somewhat simpler one. It is: Would the world be a better, fairer place if there were more accountability for the crooked Wall Street CEOs and the hack economists and the macho Type A traders and the government toadies who all, all together, failed us on an unprecedented scale? And the answer is, Yes, absolutely it would.

*** There is a Republican story about the financial collapse that blames it all on Jimmy Carter's Community Reinvestment Act and/or Fannie and Freddie. It is a false, pernicious, ridiculous story. And yet. Acknowledging the truth that derivatives run amok caused the financial crisis shouldn't mean denying that there was a sense in which even ordinary homeowners were in some ways complicit in creating the bubble. A bubble is a kind of mass delusion, and requires the participation of masses.


KT said...

I kind of feel like you answered your own question about why homeowners aren't held more responsible for the housing bubble, even though they benefited at the time. I would say the analogy regarding the doctor as mentioned in the interview is instructive. If a medical person lies to the FDA and a drug gets approved that shouldn't and millions of people take it and at first it helps their symptoms but then it causes heart failure, is it their fault for taking it? No, because we have a good-faith belief that the experts will tell the truth. Such is the case here.

I'm sure there are some examples of greedy people who should have known better (I have no idea what the TV show is about that you mentioned; I doubt I knew about it at the time much less remembering it!) but if the financial experts are telling you that your home should be your retirement fund, is the average citizen expected to know better? (I assume that's what you meant by "home-as-retirement-fund" anyway.)

Not to mention it's been "common wisdom" for as long as I can remember that it is always more financially sound to buy rather than rent. So if suddenly some bank tells you "Hey, there's a loan that makes that possible!" of course people are going to get excited.

Libertarian types always seem to want to say "caveat emptor" during these sorts of discussions, and say that the average citizen should know better, but I just don't see how it's practical for everyone to be an expert on everything, and still be able to have a job and make a living, etc. I do think we need to be able to trust to authority to do the right thing, and that's what failed here. And that's why I don't feel particularly compelled to discuss the people that benefited from it so much. They were the swindlees, not the swindlers. If they didn't love it for a while, they would't have bought into it, so it wouldn't have been a good con. Name of the game.

Rob said...

Right. Right right right right right. Homeowners aren't responsible. They were the swindlees! I guess my point is a kind of small one, but it's that there was a period of time when it was obvious that there was a housing bubble, but it was in everyone's interest -- banks, regulators, government, AND homeowners -- to pretend that there wasn't.

I don't in any way believe this makes homeowners at fault or "as" at fault as banks/regulators/government. That would be absurd. I do think a good non-ideological look at housing bubble hysteria might be instructive, too, though maybe that is a different movie.

KT said...

That makes sense - I don't think I knew there was a time when it was obvious to housing owners that there was a bubble so that's probably where I misunderstood your point.

Non-ideological looks at pretty much anything are good, I think. Although swype on my phone thought I wrote "non-urological looks" at first, which I think would be very different.

Rob said...

Though I think I would prefer a "non-urological look" to the alternative...

CitizenDino said...

I saw this a bit ago, and loved it. Like you I could not help but think of Moore, and comparitivly his lack of academic discipline.

I loved your review as well.

Saxdrop said...

Rob, I had a long a thoughtful comment which then disappeared when I tried to publish, so here's the annotated aphoristic version:

--If you buy a house with 0 down (or something close to it, you're not a homeowner, you're a renter.

--Blaming CRA (false). Blaming GSEs (partly true). Blaming derivatives, or the existence of a financial instrument (misplaced -- derivatives do not on net add to risk exposure because they are only derivative of the underlying security).

--Bankers are greedy, clever, and rapacious? Yes, but, well, duh! Is this new? Was this an exogenous shock in 2007-08?

--Regulatory arbitrage opportunities from capital standards (Basel II), securities rules (SEC), and bank supervision (FDIC) created opportunities for banks to exploit. So, yes, banks are to blame, in the same way dogs are to blame for chasing cats.

haahnster said...

So, yes, banks are to blame, in the same way dogs are to blame for chasing cats.

Well, if bankers chasing money is that instinctive and amoral, then they obviously need the regulatory equivlents of leashes and fences... perhaps even shock collars.