Last chance to weep for Iceland

‘You go with the information you had…’

I’m probably almost the last person to have seen Charles Ferguson’s documentary Inside Job. But the film is still showing in a few cinemas in Sydney, Melbourne and Brisbane, so it’s worth making a belated recommendation. If only for the Icelandic glacier shots at the beginning, see it on the big screen while you still can.

I had pretty high expectations, but the documentary easily surpassed them. It manages to deliver a devastating indictment of the American financial sector and its accomplices in the government, without leaving itself open to accusations of exaggeration, left-wing bias or peddling conspiracy theory. In short, it was the film Mike Moore couldn’t have made.

It has three particular strengths. One is the structure. On one side, it movingly shows the human consequences of the disaster in the form of of low-income mortgagees heartbroken, workers unemployed, and indeed small countries like Iceland brought to ruin. On the other side, it breaks the catalysm into its constituent parts, focussing on each technical issue in turn: the erosion of the legislative framework, the roles of the mortgage and securitization industries in creating the asset bubble, the scandalously unprincipled behaviour of investment banks like Goldman Sachs who sold assets they were simultaneously gambling against, the indifference of the Federal regulators to uneprecendented and perilous degrees of leverage attained in all of the biggest investment banks, and the outrageously generous bailout offered to the financial terrorists by their former colleagues now working in the Administration and the Federal Reserve.

The second strength is the emphasis on the fact that the problem is still there. The regulatory legislation passed in June 2010, nor limitations placed on executive ‘compensation’; the same personnel are still making the decisions, and some, such as Larry Summers, have actually enjoyed an increase in influence despite having been comprehensively discredited; and in probably the biggest irony, the banks who created the crisis are now demanding of the governments they bankrupted that they tighten their belts and get their houses in order.

Last and best were the interviews with some of the economists who gave their professional endorsement the myriad dangerous practices that brought the financial system unstuck, in return for lucrative fees. Glenn Hubbard comes across more like Ron L. Hubbard, Marty Feldstein like Marty Feldman, and Frederic Mishkin is reduced to incoherent babbling. Whether their reaction was aggressive, contemptuous or just plain stunned, it was fun and revealing to see these guys, who are accustomed to veneration, being made accountable and found incapable of giving account.

I have two criticisms.

First, Ferguson’s narrative follows much the same path as other notable accounts of the financial crisis, working backwards from the bursting housing bubble to the feral sub-prime lending and securitization industries, to the deregulation that made it possible and the lobbyists who fought for it, and finally to the economics departments who provided the rationale. It was at this point Ferguson goes after Mishkin and the others, the point being that their advice has been compromised by pecuniary motives. However, when it comes to the role of academic economists, what Krugman, Stiglitz, DeLong, Shiller and of course Quiggin, have been arguing, is that far from being a pristine science betrayed by a pack of academic shills, the theory itself — however personally incorruptible its promulgators might have been — is what allowed the mortgage industry and Wall Street to get so out of control. Economists who failed to foresee the crisis can always argue, as Mishkin did afterwards, and his defenders have done in various ways (via Mark Thoma), that it was an honest mistake. Fun though it was seeing the likes of Mishkin reduced to incoherent babbling, the film might have done a more valuable service by explaining the pernicious role of abstract theories like the Efficient Markets Hypothesis, and over-optimistic empirical doctrines like the Great Moderation.

The second criticism is that Ferguson gives the impression that Republicans and Democrats are equally culpable. This wasn’t due to time limitations forcing him to neglect nuances in political positions: he actively maintains that ‘the two parties have been responsible for this in roughly equal measure’, and has also placed his hopes in a third political party. Many of his charges against the Clinton and Obama White Houses true, especially regarding their inexplicable, continuing willingness to give jobs to Wall Street executives like Geithner and Summers. However, Clinton has, for what’s it’s worth, admitted that overturning the Glass-Segall Act was a mistake, and Obama did pursue regulation as far as he could. The progress of the Dodd-Frank Financial Regulatory Reform Bill wasn’t hampered by lack of support from Democrats in general, whereas only three Republicans supported it. Whether the various regulatory bodies created would have proven to have any teeth, had the Democrats retained control of Congress, is another question. It’s a case of half a loaf versus no bread at all: the Republicans are already undermining the legislation, and may even succeed in repealing parts of it. The gulf between Democrat realism and Republican delusion is also evident in the recently released Report of the Financial Crisis Inquiry Commission, as Jeff Madrick explains.

These are not minor quibbles; no analysis is going to do justice to every facet of such a huge topic. It’s impressive that Ferguson managed to illuminate as many as he did.

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9 Responses to Last chance to weep for Iceland

  1. Dave Bath says:

    Via http://www.economist.com/blogs/freeexchange/2011/04/financial_markets_0 to a youtube vid of Simon Johnson (former IMF cheif economist, now a prof at MIT Sloane Management) takes about 5 minutes at the recent Bretton Woods conference to cover much of the same material in a very lively and fact-rich manner – a quickie titled “to big to fail” – pointing to the GFC not so much as an economic failure but a political failure. Being too big to fail, confident of bailouts, lets them borrow more cheaply, and get bigger.

  2. James Farrell says:

    Thanks for that, David.

  3. Tel says:

    … the indifference of the Federal regulators to unprecedented and perilous degrees of leverage attained in all of the biggest investment banks, and the outrageously generous bailout offered to the financial terrorists by their former colleagues now working in the Administration and the Federal Reserve.

    I completely agree that corruption (the only fair word to describe it) was and still is a major component of the problem.

    … to the deregulation that made it possible and the lobbyists who fought for it, and finally to the economics departments who provided the rationale.

    Given that we agree the federal regulators cannot be trusted, and that the taxpayer funded bail-outs were paid indiscriminately to exactly the wrong people; on what basis would more regulation have helped?

    Many of his charges against the Clinton and Obama White Houses true, especially regarding their inexplicable, continuing willingness to give jobs to Wall Street executives like Geithner and Summers. However, Clinton has, for what’s it’s worth, admitted that overturning the Glass-Segall Act was a mistake, and Obama did pursue regulation as far as he could.

    “Inexplicable” really? There’s a perfectly rational explanation. Just look at where the Democrat campaign contributions come from.

    Once again, why cling to the “more regulation” panacea when existing regulations are not being enforced, and when the people in authority clearly are not about to rock their little money-earning boat? Where do you expect the miracle to come from that fixes all this?

  4. Dave Bath says:

    Parial Transcript of Johnson’s talk at http://www.businessinsider.com/simon-johnson-seriously-goldman-sachs-cant-fail-its-too-scary-2011-4

    Unfortunately, the transcript doesn’t include his “cognitive capture” comments.

    But this is a doozy, after talking about one measure of the private gain of the financial crisis, the $2B to a select group of executives:

    What’s the public loss? Larry Summers said from this podium yesterday that the TARP money would be repaid from banks and that’s probably true, but that’s not the cost. Is it 8 million jobs lost? Is it a 6% fall in unemployment and we’re still 5% down below the peak? Is it the increase in net federal government debt held by the private sector in the United States?

    Compare the congressional government office medium term forecast for debt to GDP on that measure before the crisis and after the crisis. It’s a 40% increase. That is a serious banking crisis.

    THAT’s the cost we’re looking at. That’s what the banks did to us. They got bailed out. And we have done nothing significant that will prevent this from happening again.

    Johnson also is part of http://baselinescenario.com/

  5. Nicholas Gruen says:

    Yep it was a powerful film and a good one. I didn’t like the preaching at the end – as it was unnecessary as the film made the facts speak very eloquently for themselves. I loved the squirmy interviews, but thought they would have been even better if the interviewer hadn’t occasionally shown impatience, by saying things like ‘you can’t be serious’ on several occasions. Not that something like that couldn’t be said, but that I would have liked the questioning to have been more neutral until the interviewee had really tied themselves up in knots.

    I didn’t find it that much less biased than Mike Moore – but then I didn’t really mind the bias in Fahrenheit 9/11. As in this case, the facts and the pictures did most of the speaking and they were very powerful. I remember walking out of Fahrenheit 9/11 (why is it called that by the way?) thinking what a mug I was for thinking that Bush was your fairly usual pol who, amongst all the other things in his job kind of wanted to do the right thing. I didn’t think that after F 9/11. I just thought of the Bush’s and the Saudi connection. Then again, perhaps I was manipulated!

  6. derrida derider says:

    Fahrenheit 9/11 is a play on the classic SF story Fahreneit 451. That book is about how opinion is manipulated by crude techniques – ie bookburning.

  7. wizofaus says:

    Tel – “on what basis would more regulation have helped” – the point is surely that these industries used to be reasonably well regulated, so it’s not so foolish to hope for a return to such a situation. Most likely it would involve a certain amount of rewriting existing and crafting new legislation, but a big part of it is doing whatever is necessary to ensure regulators are actually motivated to do their jobs well.

  8. Dave Bath says:

    [email protected]: The problem with achieving any return to regulation is explained by Simon Johnson, with the key “too big to fail” – scary to politicians, so they’ll do two things –
    (1) Bail out the biggies – so assured of bailouts, the biggies can borrow at lower rates than smaller competitors, and thus, get bigger and scarier
    (2) Do at Basel III what the finance industry tells them. Johnson calls Basel III a flawed process.

    There is a long history of financial crises, each time regulations are promised when the public are stroppy, then the promised regulations are watered down to homeopathic strength … A strength consistent with the basic philosophy of the market.

  9. Nicholas Gruen says:

    This great review of the film by Ezra Klein captures misgivings I had too, but so dimly that I didn’t even articulate them above.

    The real story is NOT that people didn’t predict the crisis or that some of them had incentives not to pick it. As Klein puts it

    What’s remarkable about the financial crisis isn’t just how many people got it wrong, but how many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms. “Inside Job” is perhaps strongest in detailing the conflicts of interest that various people had when it came to the financial sector, but the reason those ties were “conflicts” was that they also had substantial reasons — fame, fortune, acclaim, job security, etc. — to get it right.

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