Economics and Finance

AEI’s response to The Big Short has a point

Back to ’08.

As usual, you probably haven’t seen several or even all of the films nominated for Best Picture at the Oscars. But there’s one you absolutely should watch–The Big Short, based on the book by Michael Lewis. It was a fun movie packed with information, and with some reservations, I walked out of that movie feeling good. (Let’s just say I was more satisfied than walking out of The Force Awakens.) [I’ve already made this post controversial.]

Like I said, I have reservations. One of which is that the government is conspicuously absent throughout the film, that is until the infamous bailout breaks headlines.

“They knew. They knew taxpayers would bail them out.”

Now normally I’m one to be skeptical of something out of the American Enterprise Institute (i.e. any think tank that doesn’t at least claim it’s nonpartisan), but they raise some salient points in response to the movie’s narrative:

Over the years, I’ve heard numerous narratives on the financial crisis (the first one being “Holy shit, what happened to my stocks”), some more convincing than others, including the report of the Financial Crisis Inquiry Commission, a seminar on the topic that traced it from a series of bubbles in history, Bernanke’s global savings glut theory, the 1% screwing the 99, and most recently, The Big Short.

I’ve talked about this before, but  we don’t find the roots of the housing bubble on Wall Street, but rather government policy. The GSEs, for-profit corporations but backed by the federal government, had a social mission: to increase homeownership, which was (perhaps erroneously) linked to all these wonderful exernalities like lower crime rates and greater community investment. Both parties, particularly Democrats, were pushing policy measures hard to boost home ownership.

We can’t forget that not only was the government “asleep at the wheel,” but it was also encouraging Wall Street’s behavior. While lenders, as depicted in The Big Short, did resort to sort-of despicable means to get poor people and immigrants to sign off on subprime mortgages, they didn’t necessarily come up with the idea. The presidents and members of Congress became so obsessed with the American utopian idea of having a home that they failed to account for all the misaligned incentives and Wall Street’s willingness to ride that to the bank (to themselves?) . Furthermore, when trouble was on the horizon, the government deepened the panic by not making firm commitments on whom they would save, and though the video makes mention of Bear Sterns and Lehman, it wasn’t even clear the GSEs would be rescued.

I want to be careful here. Wall Street is not off the hook. This video is still problematic in that it ends with the word “regulation,” because naturally AEI wants to push its agenda that further regulation will send our economy crashing to the ground. It wasn’t increased regulation so much as one particular misguided policy that led to the housing crisis and ultimately the subsequent financial collapse. So therefore this alone does not preclude the need for prudent financial regulations. But this video is correct in assigning the cause of the crisis to a more complex story than given in the movie.

Moreover, this sequence of events tells us the folly of putting infinite faith in a single asset, whether it be houses or ’90s websites or flowers or beanie babies. It was particularly destructive in 2008 because the Street turned excessive mortgages into MBS and then CDOs (watch The Big Short and have Selena Gomez explain that one to you), setting up a house of cards. In one of his Khan Academy videos, Sal Khan breaks down the difference with buying vs. renting, and on the side, the peer pressure he’s feeling to choose the former. This was in early 2008. Yeah. Avoid the peer pressure. Whether it’s from your family or from the government.

Did I end this post with hating on the idea of buying houses, again? You bet I did.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s