"Inside Job"

genkaku

Sorry if it has been posted before, but I just watched the Academy-Award-winning 2010 documentary "Inside Job" for free last night. For those with some patience (a little under two hours), it's a pretty good description of how and why the world got into the economic mess it is currently in.

possibilities

Thanks - will watch it later.

NomaDBuddha

Well, would you like to make a long story short , for me please ? I don't know why, but my youtube doesn't work ( my C:/ memory is 0 kb, from unknown causes and I can't watch any video on the internet). Thanks a lot.

genkaku

The long story made short is that those who stood to gain arranged it so that they and their friends did gain ... bigtime ... at the expense of those who lost. Those in positions of power and with the opportunity to do good did not do so ... and then took zero responsibility for what they did ... and continue to do.

praxis

There must be a push for regulation, yes?

buddhajunkie

I liked "Inside Job", but I think it's an incomplete story.

There are many other plausible explanations for the housing boom/bust and ensuing crisis. However, they are not nearly as dramatic as the "blame-it-all-on-Wall-Street" explanation. Thus, we don't hear about these other explanations (and certainly we don't see movies about them).

For a more balanced perspective, here is a rundown of various explanations for the crisis (written by a liberal economist for a liberal newspaper). Note that the reasons are not necessarily mutually exclusive.

http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/?pagination=false

Cliff notes:

-the housing bubble was a global phenomena that even occurred in counties with much tighter financial regulations.

-the world was flooded with excess savings (from exporting countries like China) looking for something to invest in (such as housing).

-the U.S. government encouraged sub-prime loans through Fannie Mae and Freddie Mac, two government-sponsored entities, in order to make housing more available to people.

-the U.S. Federal Reserve maintained a policy of promoting low interest rates, in large part done to keep unemployment low. These excessively low-interest rates made home loans excessively cheap and available.

praxis

There are many other plausible explanations for the housing boom/bust and ensuing crisis.

From a very brief skim it looks like the global savings glut, etc, are additions to the explanation.

-the U.S. government encouraged sub-prime loans through Fannie Mae and Freddie Mac, two government-sponsored entities, in order to make housing more available to people.

If true that would be more disturbing than simply greed.

zenff

The economy does not always express all costs in prices. (For example: a free economy does not put a price on pollution of the environment.) It’s unrealistic to expect the market to behave responsibly.
It can’t.
It’s not designed for letting companies make responsible decisions; not on a scale bigger than the short term interest of making profit right now.

Okay so we ask governments to regulate the market. Politicians know better?
No, politicians are aiming at being elected this next election. They don’t look ahead necessarily. There’s no mechanism for rewarding long-term responsibility in politics either. The next election is a politician’s horizon.

The point is that we can blame bankers and politician for making irresponsible decisions, but we have to take into account that they operate in a system which rewards exactly what they did.

Free market and democracy are not perfect tools to guide society. They have good sides to them, but they are not perfect.

It comes down to the people in this imperfect system.
We need people who just have it in them to do the right thing in spite of the market and in spite of the upcoming election. We need people who can ignore short-term rewards and do what is right in the long run. We need politicians and captains of industry who have wisdom. We need many of them.

In short: I’m a pessimist.

frequency86

http://www.thrivemovement.com/the_movie

Here is another one that was pretty entertaining.

KnightofBuddha

Economist Thomas Sowell laid much of the blame for the housing bust on the government push for subprime mortgages and legislation that encouraged home ownerership for low-income individuals.

I'm not convinced that more regulation could have prevented the housing bubble from forming...or bursting.

person

I agree with both @buddhajunkie and @zenff. There was a high demand for investment and an interest from government to have people own instead of renting which caused the incentives for mortgage brokers and firms to push people into loans and then bundle them off to someone else. The rating agencies rated these risky loans as AAA investments when they weren't even close.

People in business do whatever the incentives tell them will make the most money. Politicians do whatever incentives tell them will keep them in office. Some systems are better than others but even the best systems and regulations break down with enough greed and corruption.

praxis

Isn't there always a high demand for investment?

person

Isn't there always a high demand for investment?

Its about the supply of investment sources vs. the demand for them.

praxis

So if all the bad loans were not allowed there would not have been as big a supply. I see.

person

So if all the bad loans were not allowed there would not have been as big a supply. I see.

Yes, there was a lot of demand for the bundled mortgage investment packages so mortgage firms were able to unload even bad mortgages easily. Thus making the incentive to just pump out as many mortgages as possible since even risky mortgages were rated as quality investments.

person

So I think this is a good example of the importance to keep a balance in the economy. We often hear from the right of the importance to give 'job creators' tax breaks so they can invest in the economy. In this instance there was too much investment capital out there looking for a home. So the idea that always making sure the wealthy have plenty of money to invest to make the economy go doesn't seem to hold water here. It takes the correct amount of capital investment and the correct amount of consumer demand to run effectivly. So sometimes more investment is required and other times more demand.

Of course, for a politician to say one thing is right one time and the opposite is right another time gets them labeled a flip flopper, so the politics tend to be one sided.

justshea

The wealthy have been screwing the poor since the beginning of time, why is this news?

possibilities

Watched it last night --- so depressing. :-( I'm afraid I didn't even really understand much of the financial jargon and goings-on. Re investment/imbalance, I believe the problem is that there was no real value behind the "investments" - they were just "potential" income, so really have nothing to do with laws guiding economy. Someone mentioned it was like a giant Ponzi scheme.

What I find most discouraging is that the apparent culprits are now Obama's advisers. I was critical of his campaign based on nothing but 'hope' and now this approach (and people being gullible) seems very similar to the financial gamble - all based on wishful thinking in a bad way.

praxis

So if all the bad loans were not allowed there would not have been as big a supply. I see.

Yes, there was a lot of demand for the bundled mortgage investment packages so mortgage firms were able to unload even bad mortgages easily. Thus making the incentive to just pump out as many mortgages as possible since even risky mortgages were rated as quality investments.

If demand was a big factor then wouldn't there be a strong incentive to circumvent regulations that were established to prevent this kind of activity?

person

If demand was a big factor then wouldn't there be a strong incentive to circumvent regulations that were established to prevent this kind of activity?

Yeah, you're right and thats a lot of what happened. There was a lot of misleading customers, forging of mortgage documents and other illegal activity.

praxis

Unless I'm mistaken, in the movie it shows that some of the activity was illegal... until it was made legal.

person

Unless I'm mistaken, in the movie it shows that some of the activity was illegal... until it was made legal.

I hope I wasn't giving the impression that people were acting legally or ethically. The main point I was making is that the situations set up certain incentives. Laws and regulations were in place but the incentives to make money was strong enough that there was widespread fraud and abuse. There were people who noticed and even spoke up but the higher ups ignored or even punished them so the cash could keep flowing. Also the executives gave themselves golden parachutes so when it all came crashing down they'd be fine. No ones even gone to jail yet and no real reforms have been passed.

buddhajunkie

From a very brief skim it looks like the global savings glut, etc, are additions to the explanation.

No, Krugman is arguing against the other explanations. It should be noted that he won the Nobel Prize for his work in international trade, so perhaps he has a bias towards looking at international causes.

Isn't there always a high demand for investment?

No. Demand for investment is pretty low now. The Fed has made bank-to-bank loans almost 0% yet there's not much lending (for investment) going on. You can lead a horse to water...

praxis

What I mean is, good investment opportunities are always valuable. A good investment is a "sure thing," and if it's an inside job it will be a sure thing.

Don't know what I'm talking about of course.