The ‘Big Short’ Movie Gets It Right

The ‘Big Short’ Gets It Right
Explanations driven by ideology don’t hold up.
Bloomberg, January 6, 2016




One of the most widely anticipated films of the holiday season was released to big audiences and wide acclaim. It tells the tale of an epic battle between the forces of light and darkness, filled with arrogant but lovable characters, some of whom, despite their obvious flaws and shortcomings, redeem themselves by taking on and winning against an evil empire.

I refer not to “Star Wars: The Force Wakens,” but to the film adaptation of Michael Lewis’ book, “The Big Short.” It chronicles how a motley crew of assorted traders and fund managers came to understand the impending housing implosion, and discovered a novel way to make a bet on it. It isn’t a spoiler alert to say that the financial world collapses, the protagonists get rich and no one lives happily ever after.

The reviews have been mostly excellent — Rotten Tomatoes has the critics’ ratings at 87 percent; they call it a “scathingly funny indictment of its real-life villains.” Among movie-goers, it ranked at 90 percent; I loved the Lewis’ book, and to the extent the movie deviated by veering into some absurdist comedy, I’d give it an 80 or so out of 100. Perhaps the film “Margin Call” is a better Wall Street drama; “Trading Places” is certainly a much funnier movie. Regardless, it’s good wonky fun all around.

As someone who has studied the financial crisis, and written a well-regarded (see thisthis and thisbook on the subject, I can say that the film gets the broad strokes of the crisis correct. A complex set of factors led to a unique bubble in mortgage credit, followed by a crash in valuations that almost took down the rest of the economy.

A small group of pundits have criticized the movie, claiming that the fundamental narrative is wrong. The government, they say, is at fault, because it forced banks to give mortgages to lower-income people who couldn’t afford them. Barron’s blamed Bill Clinton, the Wall Street Journal blamed “uncertainty about how government would treat the biggest banks,” and Peter Wallison at the American Enterprise Institute went back to pursuing his white whale, blaming Fannie Mae and Freddie Mac for all that is wrong in the world.

Each of these arguments has been so thoroughly debunked over the years that they are not worth spilling more than a few pixels here. Yes, Clinton — and George W. Bush after him — both promoted housing for lower-income families. However, these were not the mortgages at the heart of the crisis. As my Bloomberg View colleague Noah Smith observes, “housing bubbles manifested in many countries that had no equivalent to the government-sponsored enterprises Fannie Mae and Freddie Mac, the bubble was driven by middle- and high-income borrowers, and the borrowers who drove up prices were primarily speculators rather than owner-occupiers.”

These false claims, however, delight fans of cognitive dissonance, and they provide us with a textbook case of what occurs when facts intrude on an ideology that has failed real-life tests. Indeed, some of the people who helped cause the crisis are the biggest proponents of this counternarrative: radical deregulators, free-market absolutists and others simply couldn’t accept the facts, and rather than change their belief systems, they simply refuse to reckon with reality. The psychology behind this is well-understood: The reason to ignore a mountain of facts aligned against an ideological narrative is the brain’s refusal to cope with the possibility that a deeply held belief system might be wrong.

Consider the many failed attempts to throw blame elsewhere: It was first directed at the 1977 Community Reinvestment Act, then the Federal Housing Authority, then Fannie and Freddie. Former Senator Phil Gramm, who was behind both the repeal of Glass-Steagall and the introduction of the Commodity Futures Modernization Act of 2000, to this day refuses to recognize the consequences of those two legislative blunders.

Back in 2008, I created a list of “who was to blame” for the crisis, and it included more than 30 institutions, individuals and legislative decisions. Many, many errors were made in the decades leading up to the credit crisis; to claim any one factor was the main cause fails to understand the basics of causation or complexity.

Those who ignore the heaps of data and evidence and repeat an unsupported narrative have not only failed to prove their arguments, they have revealed their own biases and ideologies. It might be a good way to get grant money from partisan donors and think tanks, but it is a terrible way to perform honest analysis.



Originally published here: The ‘Big Short’ Gets It Right

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Whammer commented on Jan 6

    Did you not allow comments on Bloomberg just to pre-empt all the idiots?

  2. dvdpenn commented on Jan 7

    Loved the book and the movie. And I’ll agree that “Margin Call” is a LOT of fun!

  3. postpartisandepression commented on Jan 7

    It really was an excellent movie on a tough subject. Took my teenage son and he said “it wasn’t as bad as I thought it was gonna be” high praise indeed. His main question walking out of the theater was “how much money did we lose”? It caused him to think seriously about things that he was really too young to understand when it was happening. It should be required viewing for all who planning to vote in the fall.

    I have always been of the opinion that the tea party as it was originally conceived – anger at the collapse of the economy and the fact that Wall street and bankers were not punished- and the left had common cause. Perhaps if the tea partiers saw the movie they might redirect their anger appropriately and help get rid of the politicians that enabled the fraud.

    Yeah I know teenage boys can be made to understand complex issues but it is hopeless for the majority of republicans. Facts still matter to the young.

  4. Ephman commented on Jan 7

    I think the problem with the housing market is that the government is half-way in; it would be better if they were more involved or less involved. If we as a society feel that providing some kind subsidy for low income housing, then make Fannie and Freddie government agencies. If subsidized housing is not a national priority or you are against government involvement, the private sector can provide mortgages and loan syndications just fine. Just don’t rid of Fannie/Freddie and ask for a government guarantee for whatever replaces it; guarantee is just another name for subsidy. The moral hazard of privatizing profits and socializing losses was at the heart of the financial crisis and the current To-Big-To-Fail problem. There is plenty of money around to fully capitalize a private successor to Fannie and Freddie (but that would cut into leverage and profits), so the banks will do all they can do to get back to the federal trough.

Posted Under