The Big Short: a good movie and a bad message
January 28, 2016 | by Sergio Alberich
“True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.” – Ludwig von Mises
Last week I finally went to the movies to watch The Big Short and on my way out I could not stop thinking about Sergio Leone’s The Good, The Bad and Ugly. Not that the plot of a Clint Eastwood Western from the 60s had much to do with the 2008 financial crisis action portrayed by Ryan Gosling, Steve Carell, Brad Pitt and Christian Bale. It was just that the old title so perfectly summarized my thoughts on the new movie.
As most of Michael Lewis’ writings, the story is anchored by very colorful characters that make the dull and dry subject of the financial crisis much more engaging and entertaining. The acting is good, and while a bit over the top in many occasions it suits perfectly the pace and the narrative style. Also, the director Adam McKay (known for a few Will Ferrell movies) does a fantastic job explaining the complex financial products (MBS-mortgage backed securities, CDO-collateralized debt obligations, synthetic CDOs…) that are regularly associated with the housing crisis but rarely understood.
Still, the things I associated with good, bad and ugly are not related to the aspects just mentioned, nor to technical details most movie critics would look at. The good is the superb illustration of entrepreneurship, the bad relates to the details the narrative leaves out (the lack of a clear explanation of the actual reasons that led to the crisis) and the ugly, the very ugly side of the movie, is the notion left to the viewers that more regulation was the answer, that it would have prevented the past crisis and made things better today.
The entrepreneurial exposition is fascinating and beautiful. Michael Blurry (Bale’s character) reading spreadsheets, coming up with a strategy and convincing banks to sell him Swaps is off the charts. Mark Baum (Carell) and his team conducting due diligence in Florida and Vegas while talking to stripers, mortgage brokers, rating agencies and fund managers is the homework one would expect from any responsible entrepreneurial investor. Vennett’s (Gosling) quick thinking in realizing what Blurry was doing and finding a way to play a different role is a great example of entrepreneurial creativity. And the two young fund managers who join forces with Ben Rickert (Pitt) and find yet another way to bet against the housing bubble are pure entrepreneurial contrarians.
While they get to short sell the market in unique ways (dealing with and overcoming their own particularities), all of them face harsh criticism from their peers (and bosses and investors), endure a lot of pain executing their plans (showing that it is not only about the idea, but also about the execution, the entrepreneurial action) and indirectly help to put an end on an unsustainable situation (the longer a bubble lasts, the stronger is the burst).
The fact that short sellers, usually demonized by the financial media, are the heroes of the story is one of the movie’s big accomplishments. It shows that these entrepreneurs not only created and transmitted new information but also, through their individual actions, helped better coordinate a market in desperate need of coordination. Undoubtedly a valuable service for society.
Moreover, the fact that these characters are portrayed as regular folks working with other people, presenting their ideas to others (many times being ridiculed by their listeners), and not working as isolated atoms that have access to data no one else has, makes anyone question the upside-down world of mainstream economics and finance. A paradigm that excludes the entrepreneur from its theories, reduces human action to the maximization of known equations, puts aside the ever-changing world in the name of static models and treats information as an objective and omnipresent piece of data.
Hopefully, the next time someone reads a newspaper article, listens to a politician or receives an investment report that centers its analysis on Perfect Competition Models, on EMH (efficient market hypothesis) or MPT (modern portfolio theory), one can remember of the heroes of The Big Short and be skeptic of their conclusions. (as a side note, I remind the reader that not a single one of these three theories could a priori foresee the crash, nor a posteriori explain it)
Yes, the good side of the movie is incredibly good and allows a full range of reflections, but it is still hard to say the outcome is entirely positive. Not explaining the actual causes of the crisis is significant, but could have been overlooked if it was not for the fact the movie clearly implies that, in one way or another, it all could have been avoided if not for pure greed and lack of regulation.
First of all, and paraphrasing Tom Woods, blaming the crisis on greed, is like pointing a finger to gravity when a plane crashes. What we have to understand is why so many people, smart and dumb, good and bad, selfish and generous, made the same mistakes (of course entrepreneurs and investors err, but why everyone, at the same time and place? Why everyone downplayed the risks?). And why the same clusters of errors centered on the housing market.
Second, blaming the crisis on lack of regulation has to be seen as a complete lack of knowledge of the facts. From the time the so called “deregulation” of the financial markets started in the early 80s until the housing bubble burst, regulatory agencies had had their budgets multiplied by 3 (in constant dollars – the SEC alone, portrayed in the movie as a resource deprived agency, had seen its budget grow almost 500%, inflation adjusted, in the period to reach figures close to US$ 1 billion in 2008) and there had been 4 regulatory policies for every deregulatory policy. Also, at the moment of the crisis, there were over 12,000 bureaucrats working in financial regulation in Washington DC alone and there were at least 115 agencies regulating financial services at the federal and state levels in the USA (Woods/Thornton, Murphy, SEC Budget and Boettke/Horwitz).
Lack of regulation? Really?
What lacks is the movie mentioning that the FED (which is not an institution of the free market) kept interest rates very low in order to drive an artificial credit expansion that funded bad investments. It fails to mention the role played by Fannie Mae and Freddie Mac (government sponsored companies that are not part of the free market) in providing liquidity for the whole market of CDOs, MBS and Synthetic CDOs (basically, there was always a buyer for these junk assets that were doomed to be defaulted). It completely omits the fact that regulation required that such securities were to be rated by the biggest Rating Agencies (effectively giving them oligopoly power) and that banks were forced to give out mortgages to bad credit borrowers (Community Reinvestment Act).
Bringing these facts to the surface would have made the Great Recession of 2008 much easier to comprehend. Then, one could finally start to understand why so much foolish lending and borrowing took place. Why mortgage applicants who had bad credit and lacked income, jobs and means to provide any sort of down payment were been granted very cheap loans. Why Rating Agencies acted immorally and irresponsibly. Why banks were not worried about profitably selling the enormously bad loans they had made and, most importantly, why a hard crash was eventually inevitable.
It is important to point out the shortcomings of the movie because it is now common to accept that everything that has been said, thought and done (by the economic policy-makers) in the name of rescuing us from the depths of this past crisis has some merit. People might question some of the minor and irrelevant details of the bail-outs, of the new regulations, of the ZIRP (ZERO Interest Rate Policy) and of the Q.E. programs (a fashionable euphemism for printing money), but few dare to question their validity and efficiency.
Interpreting the Housing Bubble Burst for what it really was, the failure of governmental policies of easy-money, and not the misconceived idea portrayed by The Big Short, the failure of free markets, is an important step towards a sound and healthy economy (something we clearly do not have today). More precisely, it allows us to be less compelled to chew on the confused explanations of Keynesian economics, to treat seriously the irresponsible regulatory propositions to “fine-tune the economy”, or to believe that there is more to central planning economics than the inability to coordinate and the ability to destroy.