TPMCafé, October 8, 2010
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Charles Ferguson's new movie, Inside Job, is a fast-moving and fascinating account of the process and the people who wrecked the economy with their blind ambition and unfettered greed. The timing could not have been better, coming amidst the Wall Street establishment's celebration of the second anniversary of the TARP.
Inside Job begins with the tale of Iceland. It includes a great discussion of the situation of the bank regulators in Iceland during its bubble. Every policy wonk should be required to see this discussion as many times as it takes for them to realize that Dodd-Frank bill was a waste of time insofar as the goal is prevent future crises.
The journalist interviewed for the segment describes how Iceland's tiny team of regulators would confront their megalomaniac bankers. The three banks in Iceland, a country with a population that is less than half the size of the Dayton, Ohio, metropolitan area, grew into global giants in the last decade with hundreds of billions of dollars in assets. Their size dwarfed Iceland's GDP.
When a couple of regulators would go to confront one of these banks over their questionable practices they would be met by a team of high-priced lawyers. These lawyers would shoot down every argument the regulators made, forcing the regulators to go home empty-handed. In the rare occasion where a regulator held their own in these confrontations, the bank would hire them.
This is the key part of bank regulation that no one in Congress seemed interested in discussing during financial reform. Regulators are still going to confront too big to fail banks who can afford to hire the best lawyers around. These banks (think Goldman Sachs and Citigroup) also have enormous political power. They have well-placed contacts in Congress, the Treasury Department, the White House, and anywhere else that matters.
Why would any normal regulator - focused on keeping his or her job and eventually getting a government pension - deliberately cross a powerful bank and jump into a vat of boiling hot water? To ensure that the incentives were 100 percent wrong, the Washington gang made certain that no regulator was in any way punished for biggest damn lapse of regulatory judgment this country has every seen. The "who could have known?" refrain provided a blanket amnesty to the Fed chairman on down, even though the answer was "anyone who was doing their job."
Those who think that people respond to incentives know that regulatory reform is a guaranteed flop. Doing your job means trouble, whereas looking the other way carries no consequences, even when the result is complete disaster. Ferguson's discussion with the Icelandic journalist tells us everything we need to know.
The film builds up the story of how Wall Street's sleaze allowed the housing bubble to grow larger and longer than would have otherwise been possible. He fingers all the key culprits, the subprime loan issuers, the investment banks who securitized the crap and the bond rating agencies who blessed it all with investment grade ratings. Many of the key actors, including top officials in the Clinton, Bush, and Obama administrations and the Fed, as well as the CEOs of the major banks, refused to be interviewed for the film.
Ferguson reserves a good chunk of the film for going after the economics profession, which richly deserves the abuse he delivers. He includes an interview with Harvard economist Martin Feldstein, who was the long-time president of the National Bureau of Economic Research in addition to having served a stint as President Reagan's chief economist. He also served as a well-compensated member of AIG's board at the time it imploded. He calmly assures the audience that he has no regrets.
The film also includes a testy interview with Glenn Hubbard, formerly President Bush's chief economist and currently the dean of Columbia Business School, as well as an interview with John Campbell, the chairman of Harvard's economics department. But the real star of this film is Frederick Mishkin, a former governor of the Federal Reserve Board and currently a professor at Columbia Business School.
Mr. Mishkin was paid $130,000 to co-author a study on Iceland's economy in 2006, just before he became a Reserve Board governor. At the time, Iceland had a current account deficit equal to 15 percent of its GDP. This figure should have been the equivalent of a 100,000 fire alarms screaming, "finance out of control." Instead, Mishkin blessed the Icelandic success story in a study titled "Stability in Iceland." In a priceless sequence of questioning, Ferguson notes that at the time of the interview the study appeared in Mishkin's CV under the title "Instability in Iceland."
Mishkin is a poster child for the state of economics and indeed the whole elite that control the economy and society. Banal corruption has run wild and continues to go unchecked even in the wake of the worst economic disaster since the Great Depression.
Ferguson gets some things wrong in the film. While it was bad policy, it is very hard to see how the repeal of Glass-Steagall had any important impact on the crisis. Also, in summing up the size of the hit to the economy it really doesn't make sense to count the full value of the lost housing bubble wealth, since this money never would have been there in the first place if we had a properly working financial system.
But these are quibbles. Ferguson gets way above 90 percent right, which is more than twice the average for a documentary film these days. And the story is lively and well-told. No one will walk away thinking that they have been listening to an economics lecture for the last hour and a half.