We don't usually depart from our normal routine of reporting on political and economic news specific to California, but we saw the Oscar-winning "documentary" Inside Job over the weekend, and decided to break with our regularly scheduled programming to offer our thoughts. In light of the economic illiteracy we've seen in other reviewers showering the film with praise, we felt the need to say something.
To say that Inside Job plays loose with both facts and logic is being generous. To its credit, the movie at least makes this obvious right off the bat by telling us the story of Iceland's 2008 collapse. In the film's re-telling, Iceland was an ideal of modernity, with happy, prosperous people, no crime, clean industry, and spectacular scenery, until the state-run banks were privatized and the evil rich bankers made billions off of bad loans before driving the country's economy off a cliff. The anti-privatization line ignores, of course, that the whims of politicians are just as dangerous for one's savings as the incompetence of lenders. More importantly, it completely ignores the role of central banking in Iceland's downfall, which makes the rest of the argument laughable. It's simply impossible to understand Iceland's situation without considering the effects of implicit government guarantees of mortgages, artificially low interest rates, and bailouts of failing banks. (For those interested in really learning what happened there, the fine folks at the Ludwig von Mises Institute have published this excellent book.)
But that's what the rest of the movie has in store: the meltdown of the U.S. property market and subsequent banking crisis were caused by "deregulation", and by evil, greedy traders and CEOs on Wall Street, who wiped out their customers and their own companies to enrich themselves. This interpretation of events, though popular, is so blind to the underlying facts and causes of the crisis that it's hardly worth the trouble of picking it apart. Tom Woods and others have, of course, worked through the true nature of the bust more eloquently than we ever could, so we won't rehash the full story ourselves, beyond making a few key points.
First, deregulation. Given that this word is like a dogwhistle to liberals, you'd think that one of them could produce a long list of relevant regulations that had been weakened or repealed in the years leading up to the crisis. Yet, unsurprisingly, Inside Job is long on outrage and very, very short on specifics. The best they can do is to cite the partial repeal of the Glass-Steagall Act in 1999, and even this argument weakens on examination. The repeal (known as Gramm-Leach-Bliley) merely eliminated a provision that prohibited commercial banks and investment banks from existing under the same corporate umbrella, a provision that exists nowhere else in the world; other elements of Glass-Steagall, including those prohibiting commercial banks from underwriting or trading in securities and those prohibiting securities firms from taking deposits, were left intact, and other laws exist to prevent investment banks from unloading toxic securities onto commercial affiliates. Are we really supposed to believe that this repeal created some new sort of trading activity whose effects brought the world's financial system to its knees? The makers of Inside Job clearly hope so, because this is it as far as examples of deregulation go. Other practices associated with the crisis, such as derivatives trading, securitizing mortgages, and fractional-reserve banking, were legal long before it began.
Second, greed on Wall Street. Aside from the obvious problem of blaming the 2008 crisis on this (i.e., greed in finance did exist before 2001), the film ignores the government's extensive efforts to encourage risk-taking and entrepreneurial error. Were some traders, bankers, and CEOs so profit-hungry that it compromised their judgments? Absolutely; yet given the presumption of a taxpayer bailout in the event of heavy losses, these individuals had every incentive to take on as much risk as possible, as riskier debt carries higher interest rates, so should anyone have been surprised? Were some of these people vastly overpaid relative to their performance? No doubt (a word to bankers: if the Fed is lending you money at essentially zero interest, and you're lending it with interest, and you can't make money on that deal, you're not doing it right). But that's a matter for the CEO, the board, and the shareholders to decide, and there are compelling arguments supporting "excessive" CEO pay; criticizing these arrangements from afar is nothing but whining and envy.
Ultimately the film suffers most from its omissions, both of fact and of logic. Some of these are amusing - for example, any movie that devotes significant time to traders' appetite for prostitutes, yet interviews Eliot Spitzer and Barney Frank without a trace of irony, is hard to take seriously. Some are silly - the film rips the Treasury for bailing out AIG, yet moments later rips them for not bailing out Lehman. And, as a former PhD student in economics, we (okay, I) found their assertion that econ departments "teach deregulation" to be stunningly dishonest (note to the filmmakers: econ students all have to take macro, which is essentially the mathematization of government regulation). But other omissions are not so trivial. Most fundamentally, Inside Job expects us to believe that three decades of government interference in the housing market, through legislation such as the Community Reinvestment Act, agencies such as FHA and HUD, and the implicit taxpayer backing of loans via Fannie Mae and Freddie Mac, all of which were explicitly intended to degrade lending standards, had no effect on the quality of mortgage loans. It expects us to believe that trading firms' appetites for risk were unaffected by the expectation that their cronies in government would cover their losses with bailouts. And it expects us to believe that a decade of loose monetary policy from the Federal Reserve had no effect on the public's appetite for debt or the willingness of banks to make dubious loans. All of which is jaw-droppingly naive, if not worse.
The film's solution to these problems is no less naive. Meaning that it's standard left-wing boilerplate: get the Wall Street lobbyists out of DC, and tighten regulations to keep these things from happening again. We hardly know where to start with this. If we have corrupt, ineffectual bureaucrats more loyal to their friends in industry than the public, how is giving the same people more money and power the answer? Especially when we have approximately zero historical examples of bureaucrats successfully regulating an industry without being bought off by it? (It's almost like power is corrupting or something.) But more importantly, can we expect regulators to effectively tame an industry's worst impulses if doing so runs counter to the interests of the elected officials who appoint them? Don't forget: our friends in Sacramento and DC want a growing economy at all costs, with growth defined as rising prices and wages, a booming stock market, low interest rates, and low unemployment. If this growth is entirely an illusion created by inflation, or by rewriting the rules to favor their campaign contributors, our leaders are more than willing to bet that we won't hold them accountable for it. Any advisor or regulator who tells a politician to do something in restraint of "growth" is likely to lose an otherwise easy job very quickly.
Given all this, we give Inside Job no stars. To quote a more enlightening film, "I award you no points, and may God have mercy on your soul".