Bernie and the Fed

Movie – The Big Short

By Jonathan B. Wight

The ethics and economics of the financial crisis of 2008 created a cottage industry of books and movies. It is an important story and needs to be understood.

Of course, plenty of cranks are at work, trying to tell this history from a particular ideological perspective. It’s all the Fed’s fault! It’s all Fannie and Freddy’s fault! It’s the rating agencies! Buy gold!

In The Big Short, a clever movie adaptation of Michael Lewis’ book, the spin seems to be the moral corruption of the entire financial industry and the government that was supposed to regulate it. It’s not that everybody is greedy (many are), it is that they are also asleep, intellectually corrupt and unable to think for themselves. The king has clothes—because he is supposed to! They see what they want (or expect) to see. Photo

Australian actress Margot Robbie has a tiny but memorable role explaining mortgage-backed securities from a bubble bath overlooking the sea (get it? -- the "bubble"). Everyone in the audience was riveted—which goes to demonstrate the role of emotions in teaching.

Speaking of the audience—it was sparse. In the movie choice between a true and educational account of the greatest financial boondoggle in the past half-century and a fictional saga about space heroes and cute robots, you can guess who won.

This movie was about teaching, in a clever way. It had some unusual and effective props. One was a jenga tower made of wooden blocks, each representing a mortgage-backed security of a particular rating. The effective lesson was to show that collateralized debt obligations made of such mortgages were not as safe as advertised by slick financial dealers. Another was the analogy of how a great chef makes fish stew from inedible leftovers.

Richard Thaler makes a cameo appearance at a Vegas blackjack table, explaining points of behavioral economics and the exuberance and overconfidence of the bubble years.

Like any moral tale there were heroes, in this case the hodgepodge of misfits that independently and sometimes collectively came to understand the seamy side of CDOs and began betting against them (hence the “short”). There was plenty of pain and anxiety along the way, and plenty of chances for weaker mortals to back away from their heretical view that the market and its champions—Hank Paulson, Alan Greenspan, and other towering figures—got it all wrong. These brave and lucky souls ultimately won, at the bittersweet expense of all those who lost their jobs, pensions, and savings.

The Big Short is clever and entertaining and tells one side of the financial crisis. For a wider lens, I use in class the documentary, House of Cards.


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