In 2008, the financial sector triggered the largest stock market crash in history resulting in the loss of tens of millions of jobs, the evaporation of billions of dollars in savings and retirement accounts, the collapse of the real estate market, and almost no significant reform of the financial industry. We all remember those few days when it appeared the world was about to end, and we were glued to the telly observing stock traders in histrionics and just waiting for the rain of brokers from skyscraper windows. Strangely enough, the world did not end, the sky did not fall, the bailout went ahead, and very little seems to have changed. The CEOs and board members who profited from every fraudulent deal collected their bonuses while Congress blustered, and President Obama viewed the course of events with sincerely feigned concern.
Even now the economy is on shaky ground, and the average voter either barely understands how such a cataclysm could have happened with regulation in place or argues fervently in even less regulation to a financial system that appears to have lost its mind. Inside Job deftly explains the genesis of what some bankers termed ‘Armageddon’, and why this can be expected to happen again, and likely be even worse. This is the sort of documentary about a difficult subject that you may already be sick of hearing about, and think will be dull as dishwater. Quite to the contrary, it is not only enlightening, but is essential viewing, and one of the most entertaining and engaging films of the year. Yes, you need to see this, and no you will not be bored.
There are many charts and statistics that get across the vast sums of money involved, and the film makes a clear distinction between cash value of real goods and the perceived value of apparent wealth, and how this crash was really an adjustment back to reality. The value of credit is not only introducing liquidity into a market, but also an increase the actual amount of money floating around. Well, the real estate market and the complicated derivatives market that it spawned served the same purpose, and the enormous volume of perceived wealth fueled a party that we will be paying for, in real cash, for decades to come.
For perspective, Inside Job starts in Iceland, population 320,000, gross domestic product $13b, bank losses of $100b. This was previously a stable country and economy with stable banks that were public trusts. Then regulatory bodies allowed privatization of the banks, regulations limiting the investments of the banks and the amounts they could borrow in playing the markets were dropped, and financial experts attested to the stability of the banks. The banks borrowed more than ten times their value, and the bankers showered themselves with profits while blocking efforts to regulate their operations. This is the nutshell version of what happened all over the world. European banks were considerably more conservative than their American counterparts, but even sound investments turned to shit as everyone was banking on real estate and the derivative markets.
This began with the Reagan revolution, during which regulation of every industry, especially the financial industry, was weakened, and regulatory organizations like the Securities and Exchange Commission were gutted. The office that oversaw risk management for the industry had a single staffer. The Great Depression led to strong financial regulation laws, the banning of speculation by banks, and forty years of steady economic growth. In the 1980s, banks went public, and the trading led to a massive infusion of cash from the stock market.
The CEO of Merrill-Lynch was made Treasury secretary in the signature move of having banks essentially police themselves with no resistance. Then the financial crises began, including the savings and loans collapses that cost taxpayers $120b in bailout money. The solution to this hiccup was to further weaken regulation laws. Remember Charles Keating? Well, at least he went to jail behind his fraudulent practices. By the 1990s banks had consolidated into fewer giant firms. The largest merger was by Citigroup, in violation of the Glass-Steagall Act which had been in place since 1933 to control the banking industry and suppress speculation. This Act was repealed the following year in 1999 so the party could really begin. Inside Job effectively describes why this exacerbated the situation, and left only skeletal regulatory bodies to halt the destruction.
At the same time, the temptation of grossly inflating profits and fraudulent business practices would be irresistible to the sociopaths who were trusted to govern themselves. Interestingly, we get to review the innernet bubble in the 90s, as financial firms put money into companies that were expected to fail, and reaped the profits until made to settle for billions in court for defrauding investors. Sounds familiar. Still, the fines were dwarfed by the profits, and so the banks had no reason to change their practices. That the settlements involved only money with no criminal charges involved only endorsed future actions. Banks continued to expand their operations, laundering money for drug dealers, for corrupt regimes like that of Pinochet, and for Iran’s efforts to start their nuclear program.
Then we get to derivatives, which have never been explained very clearly until now. Essentially they are an expansion of the real estate investment food chain. This once consisted only of the customer and the lender; the customer was expected to pay back the bank with interest, and that was that. Derivatives allow the lender to repackage the loan and sell to investment banks, which in turn repackage and sell them to investors. Meaning the bank doesn’t give a shit if the customer ever pays the loan back, since they have their money.
Banks and predatory lending groups are incentivized to give loans to anyone for exorbitant interest rates, and since nobody cared if the loans were repaid, the commission alone was all that mattered. The loans were repackaged, sold on to investors, and ratings groups like Standard and Poor’s were paid to give them all AAA ratings. Sold things are resold until they no longer make sense; one fascinating factoid is that mathematicians helped create these derivatives.
Banks borrowed up to 30x their net worth to invest in these worthless products, and since everyone did it, and there was no regulation of it, the party kept pumping. Cash bonuses spiked, with managers and brokers awarding themselves lavishly instead of shoring up a bank’s actual assets. And then the derivatives birthed credit-default swaps so the banks could simultaneously insure their holdings and bet against them. Another great factoid (lots of these in here) is that instead of a property being insured by only one person, now it could be insured by fifty different people/financial products. So if a property owner defaults on their loan, all fifty products must cough up some green at the same time. The ability of this system to magnify how much liquid cash is in the system was eventually dwarfed by how much it could magnify the losses.
Inside Job spends a great deal of time highlighting efforts by a few heroic individuals to alert the system to the impending disaster. Each time the individual is marginalized and ignored by the banking icons. Names we know like Ben Bernanke, Henry Paulson, Alan Greenspan, Larry Summers are at the center of this storm, and all are uniform in their endorsement of a system without regulations, and their utter faith in financial institutions to police themselves. Essentially this is a faith-based system in which an industry creates its own beliefs and plows ahead with complete conviction that those rules will guarantee indefinite prosperity.
Meanwhile, borrowers had less than 1% of their own money into the houses that were bought at inflated values – and these started to drop fast. When customers began defaulting on loans and walked away from overvalued real estate, this faith-based system collapsed. Even Greenspan was forced to admit that the system failed, but every last banking bigshot clung fast to the belief that there should be no regulation whatsoever. Even as they demanded taxpayer money to fund their fuckups and pay themselves handsomely. This is the psychology of a sociopath who feels the world is owed them, and nobody may dare question either their work or their compensation. We all know the aftermath, with the titanic bailout sums involved and the recession that followed leaving a still weak economy and high unemployment rate.
And then Inside Job gets surreal. President Obama, who benefited mightily by the economic crash that allowed him into the White House, put in place the brain trust that would repair the financial system and drive reform. And we see the same fucking names that were the heads of banks that oversaw derivative markets and engineered the elimination of regulation. Summers, Bernanke, Paulson, and many other talking heads and empty suits create an incestuous web of self-policing that seemed to find very little wrong with the system, thanks. The financial reform act, decried by right-wing politicians as socialist, was intended only as a temporary measure, and did little to reform the industry. Obama followed his predecessors Clinton and Bush in being deeply conservative where it counts.
The most significant criticism of the film is surprisingly leveled at academics in economics. Professors from Harvard, UC-Berkeley, and other respected universities actually authored papers considered important in driving deregulation and endorsing the fake financial products at the heart of this disaster. Every last one of them make significant portions of their salary from working for investment firms, giving stamps of approval for their policies, and ensuring that the federal government does nothing to get in the way of the banking industry. When challenged on camera as to whether their actions constitute a conflict of interests, they balked, refusing to acknowledge such a thing applies to the financial world. Serial killers have a stronger sense of civic duty. Meanwhile, these assholes are imparting their toxic philosophy to the next crop of sociopathic economists.
Inside Job is driven to provide a clear and efficient description of what happened to our financial system, and lays blame clearly on anti-regulation fanatics who are trusted time and again to keep the system humming by one administration after another. Ultimately, however, the perpetrator of this Inside Job is the voter. We routinely vote for the charlatan of the moment, including a duplicitous Obama who was just as conservative as the Bush we all were supposed to hate. Perhaps he changed his tune after election, talking left and walking right. But did we rise to shout down his right of center policies? I sure as shit did not. And neither did you. The most vocal activists out there are the right wing radicals of the Tea Party, and their passion for no government whatsoever is the greatest gift the Paulsons and Summers could dream about.
Unless the left develops a voice for its own interests and financial survival, we may yet see a day when the United States becomes the worst investment that Europe or China could avoid. Liberals have come to feel shame for their belief in equality, a strong middle class, a living wage, and a government that does more than facilitate transfers of wealth to the wealthiest among us. We impugn the notion of arguing with the socially conservative poor who are comfortable with voting away their jobs and future in exchange for a ban on gay marriage, or the affluent radicals who feel they are owed the nation’s wealth. So arguing with them is a waste of time.
Then perhaps a new mission statement is required of the wheezing, dying Democratic party – perform or we will destroy you and your lobbyist whores. Inside Job does not hide its call to action, and feels that the United States is worth fighting for. If it is not, then perhaps your job, that savings account or retirement account that stand to be vaporized by the next engineered crisis fueled by coked-up bankers would be worth preserving. What does it take?