The Big Short – Faith in the Free Market

The 2008 financial crisis was the result of recklessness, dodgy dealings, and hubris. Like drug addicts, people bought mortgages they would have never been able to pay. Like drug pushers, mortgage brokers fed the beast until it all went belly up. Those who were meant to regulate didn’t regulate and those who raised questions were side-lined. The subprime crisis was a cultural crisis before being a financial one. It was based on the dream of homeownership and the illusion of homes as an ever increasing investment. The Big Short is the story of a group of people who went against the grain and bet against the housing market. They won. Everybody else lost.

The film paints the financial system as fraudulent. The bubble was based on people buying into the dream of spending money they did not have, fuelled by low interest rates. Everybody was taking a cut: mortgage brokers, the auditors, the banks, government. Not everybody was blind to it. The film is too keen on painting everything as one big sting thus neglecting to give credit to all those who raised alarm as early as 2002 (see John Cassidy’s How Markets Fail).

The film is entertaining, albeit self-indulgent, fragmentary, weak (why are these guys heroes?), and, worst of all, condescending to the audience (by now everybody knows what caused the subprime crisis). It highlights how nobody has really taken any responsibility, while the blame has been shifted to migrants and the poor (very simplistic, but the film can’t manage complexity). Its cynicism though obscures an important element of the crisis: belief.

People, from Alan Greenspan (former Chairman of the Federal Reserve) to mortgage brokers and pensioners, believed in the goose that laid golden eggs. They believed in the magic of finance and a few dogmas of economic neoliberalism, such as no regulation under any circumstances. The risk formulas, acronyms, jargon, and, above all, numbers and algorithms mystify. They look so scientific, solid, factual, and that’s how they work their magic.

Rationality as efficiency mars economics (especially finance) to the point of obscuring reality. As John Cassidy writes, the “notion of financial markets as rational and self-correcting mechanisms is an invention of the last forty years.” (p.36). According to the ‘efficient market hypothesis’ speculative bubbles don’t exist because “financial markets always generate the correct prices, taking into account all of the available information.” (p. 86). Nothing could be further from the truth; yet finance has a way of detaching itself from reality, or at least the real economy. Crises have a habit of happening when the real economy catches up with the bubbly world of finance.

It was the unshakable faith in the rational free market what stop Government from regulating banks and other institutions, what prevented auditors from ensuring transparency and correct information, and what drove realtors to sell properties like sweets. Alan Greenspan believed in the free market ideology firmly and was, as he recounted in his congressional hearing, “shocked” to realise that it had a flaw. This doesn’t mean that capitalism is all bad and the free market just a con, only that there are no magical or scientific formulas for ever increasing prosperity.

The solution is not to throw away the baby with the bathwater, but to challenge the orthodoxy, like economics students did at the University of Manchester, which is spreading to other countries. For more read Ha-Joon Chang’s textbook, Yuan Yang of Rethinking Economics, and Dani Rodrik on economic development and globalisation. For a far better film on the crisis, I’d suggest Too Big To Fail. The documentary Inside Job is just as cynical, but far more objective and cohesive, and the BBC documentary The Love of Money.

… and just to get annoyed with banks, below is how US banks got bigger (and therefore ‘too big to fail’) and how much we spent on rescuing them in the UK alone.

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This entry was posted in America, American dream, belief, faith, finance/economics, magic, reality, reason/rationality, The Big Short and tagged , , , , , . Bookmark the permalink.

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