Insider of the Month | Josh Bivens

March 26, 2011

What an economist thinks of the Oscar-
winning documentary Inside Job, which
deconstructs the 2008 financial crisis.

By CRAIGH BARBOZA

Josh Bivens is the author of “Failure By Design: The Story Behind America’s Broken Economy” and an expert on globalization at the Economic Policy Institute in Washington, D.C. He is known for his work in macroeconomics, with particular emphasis on monetary and fiscal policy, and is a frequent guest on CNN, NPR and the BBC. In this week’s column, Bivens watches the searing documentary Inside Job, in which its director Charles Ferguson subjects greedy Wall Street

players, bureaucrats and academic economists to fierce cross-examination to depict the 2008 financial crisis that cost tens of millions of people their savings, their jobs and their homes.

In his Academy Award acceptance speech, Ferguson called attention to the fact that three years after the crisis “caused by fraud, not a single financial executive has gone to jail, and that’s wrong.” Bivens agrees. “Not only have they gotten away with it,” he says, “they’re back to being some of the most highly paid people in the United States.”

Does Bivens think the perpetrators will go unpunished? “William Black, who was a regulator during the Savings and Loan crisis, has written a lot recently of his distress with how little has happened in the way of criminal referrals and prosecutions,” Bivens said during an interview last week. “So you’ve got your fingers crossed. Maybe cases are being built and they’re working their way through the system and there really will be some serious accountability. I, personally, hope every legal avenue is being pursued because it’s obvious from the construction of some of these risky financial instruments that led to the crash (like the no income, no job, no documentation loans) that there was rampant fraud.”

THE ANALYSIS “Inside Job was great, and it’s a huge public service that it’s out there. I imagine I may have learned a little less than most people because, you know, it’s part of my job as an economist [laughs] to monitor some of the things the movie talks about. But to have it all telescoped into two hours, without being able to look away, still makes the blood boil in a way that I was a little surprised at.

“I thought I’d formed an awfully cynical view of what had happened over the past couple of years. But it’s one thing to read about or analyze the ways in which the financial sector was flawed, and even corrupt, and another to see it play out in front of you.”

THE DOMINO EFFECT “The documentary begins in Iceland, the sparsely-populated island country in the North Atlantic which, until recently, was considered a model society. There are some fantastic aerial shots of its peaceful landscape then very quickly we learn, by way of Matt Damon’s narration, how their economy collapsed in a matter of just a few years and the country went bankrupt.

“Iceland is a great place to start this narrative because it was this tiny little intense laboratory of financial deregulation that led to a crisis that ended up taking out most of the global economy. It created a domino effect. Iceland broke down first, followed by Ireland, Spain and the United States.

Iceland was also the case where, and I guess I’m a little obsessed with the economists’ role in all this, you could not have had danger signs blinking any harder than they were blinking at Iceland, and yet financial experts went there and wrote reports praising its financial sector.

“Iceland’s trade deficit in 2005 was 15% of GDP! That’s an absolutely shocking number. It’s the kind of the number that is inevitably associated with a mammoth financial crisis. I mean, to the degree that we let our banks grow big relative to the economy, and let our financial imbalances really threaten our overall economy, and we did, Iceland was that situation times ten.”

FINANCIAL TRICKERY! “You can write a volume of books about the various ways the financial sector fell down on the job; it’s supposed to allocate capital efficiently and manage risks, and it clearly failed at both those things. It didn’t allocate capital very efficiently. Instead it just plowed tons of money into what was obviously a housing bubble. From any objective look, that’s not a smart place to throw all your capital. And in terms of managing risks, well, we all know how well that turned out. They didn’t even manage their own firm’s risk, let alone the risk to the broader economy.

“I thought Inside Job handled those basics well, then it even got into some of the ways the financial sector managed to hide how poorly it was doing its job. That’s how I view the proliferation of exotic financial instruments, like *collateralized debt obligations. Those were exercises on the part of the Wall Street to obscure the fact that what they were doing is pushing lots of risk on people, but telling them they weren’t.

“Banks were telling people, ‘Buy shares in a C.D.O. It’s incredibly safe. It’s rated triple-A, and yet it’s paying you a higher rate of return than Treasury bills.’ That seems like magic and it turns out it was magic. It couldn’t really exist.”

*C.D.O. is a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets. Each C.D.O. is made up of hundreds of individual residential mortgages. C.D.O.s that contained subprime mortgages or mortgages underwritten because of predatory lending were at greatest risk of default. They are blamed for precipitating the global crisis and have been called “weapons of mass destruction.”

THE GREAT HOUSING BUBBLE “The one thing I would like to have seen more of is how exactly the financial sector’s enabling of the housing bubble translated into the recession. For decades, home prices rose as fast as every other price in the economy. All of sudden, around 1999, they start racing ahead. Clearly, there’s a speculative bubble going on, and you would think a brilliant financial sector would realize that and not invest in assets guaranteed to decline in value. They didn’t. They kept inflating the bubble.

“The bright minds in finance told the American public, ‘You should feel free to borrow against the value of your home because there’s no reason to think home prices will not go up forever.’ That was essentially the message. Even Allen Greenspan [Chairman of the Federal Reserve from 1987 to 2006] in 2004 was

telling people to take out variable rate mortgages because they could afford more home that way. Greenspan was telling them this as interests rates were at a 30-year low.

“Then as the eight trillion dollar housing bubble burst, you had homeowners, people who were used to withdrawing tons of housing equity every year to support their consumption, suddenly *underwater on their mortgages. People were less wealthy. So they started saving more and that’s what led the economy down. That’s the recession.”
*Being underwater on a mortgage means you owe more on your mortgage than the house is worth.

NAMING NAMES “Watching Inside Job, it’s amazing to see how quickly the people involved in this mess — the big players on Wall Street and in academia who told everyone deregulation was going to work out fine and the practices of these companies were perfectly intelligent and ethical — went from feeling maybe a little abashed [laughs] by how things turned out back to personal entitlement. They still think, you know, ‘We deserve deference. We actually didn’t need any government oversight.’ That’s what’s really incredible to me.

“One of the things I liked about the film is it really names names, in terms of people in the financial sector who carved out very comfortable lives for themselves and academic economists who were being paid lucrative consulting fees from giant financial institutions. A few of the professors are interviewed in the film and I’m sure they thought they were going to be talking to someone who wanted to pick

their brilliant brain about the crisis. The idea that instead they were being fingered as people who were in some way culpable for the crash, you could see, really irritated them.

“High up on the list of people who come off the worst, just in terms of sheer visceral kind of ‘this guy does not get it at all,’ is Glenn Hubbard. Hubbard was Chief Economic Advisor during the Bush Administration and is the current Dean of Columbia’s business school. When he’s asked rather simple questions about conflict of interest, like, ‘Do you think it’s a problem to collect a lot of money from an industry and then talk about that industry and make policy prescriptions for it?’ — which is a perfectly fair question — his very angry reaction was a real highlight of the film.” ⏏
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Craigh Barboza is the Editor of MyDVDinsider. He last wrote about the movie karaoke Yoostar 2.

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