THERE’S NO SUBJECT ON EARTH, with the possible exception of sex, that human beings find more inherently fascinating than money. Yet somehow most of the movies about the 2008 financial collapse have been as enticing and zesty as a raw potato.
That’s finally changed with The Big Short, based on the book by Michael Lewis about a small assortment of “outsiders and weirdos” who made hundreds of millions of dollars betting that the housing bubble of the 2000s would collapse. Near the end of the film one of them, played by Steve Carell, declares, “We live in an era of fraud” — not just fraud on Wall Street, he says, but sports fraud, corporate fraud, and government fraud.
What sets The Big Short apart and makes it truly great is that it portrays this worldwide, straight-faced fraud accurately; that is, as not just dangerous and enraging, but also extremely funny. It calls to mind Monty Python’s famous dead parrot sketch about a pet store salesman who defrauds his customer and then offers an endless stream of preposterous, contradictory obfuscations to conceal the obvious reality. The Big Short demonstrates that we’re now all living in that pet store.couldn’t do it, so they got Harper’s editor Lewis Lapham instead.) And with Sex Panther Cologne, McKay had already proven he possesses an extremely rare but key skill for The Big Short: making people laugh at percentages.
What this means is that The Big Short is a movie that normal people will actually enjoy and understand, and that will make them as angry as they should be about what’s been done to us. So please grab your friends and family, including the ones who’d be way more excited to meet Tony Stewart than Jon Stewart, and go see it right now. It’s currently in limited release and doesn’t open nationwide until December 23, so you may all have to move. But it’s worth it.
Then after you’ve seen it, please come back here and read the rest of this. As good as The Big Short is, the housing bubble was such a gargantuan crime that no movie can capture more than a tiny corner of it. There’s much more to what happened, and even seven years after the bailout, little of it is widely understood.
Beyond The Big Short
• What happened wasn’t that complicated
The Big Short includes brief segments featuring Margot Robbie, Anthony Bourdain, and Selena Gomez explaining the gobbledygook jargon of the crisis, like mortgage-backed securities, credit default swaps, and synthetic collateralized debt obligations.
But in fact you don’t need to know any of that to understand the overall picture. In all the financial industry’s history it’s invented maybe three scams total, which it cloaks in an infinite number of ever-shifting disguises. And the housing bubble was one of those basic scams: In essence, it was a gigantic counterfeiting operation.
Everyone knows that you can counterfeit money. But money is just a piece of paper that everyone believes has value, and there are other pieces of paper that people believe have value too — government bonds, corporate bonds, stock certificates, etc.
During the 2000s housing bubble, the market “value” of U.S. homes swelled to about $8 trillion more than it would have been if prices had followed historical trends. To give you an idea of how big a bubble that is, the entire U.S. Gross Domestic Product in 2005 — that is, the value of literally everything produced by the United States that year — was only $13 trillion.
Wall Street joyfully issued bonds “backed” by trillions of dollars of that imaginary wealth, and paid ratings agencies to certify that the wealth was real. The effect on the economy was more or less the same as if Lloyd Blankfein had printed trillions in cash in Goldman Sachs’ basement and somehow persuaded everyone it was real and belonged to them. We all felt richer — for a while. The reason financial bubbles are so common is that they feel so good to almost everyone on the way up.
(One small difference was Wall Street’s take: Regular counterfeiters generally want to spend all their bad paper themselves, whereas Wall Street just took a percentage for running the presses. Then they often, though not always, passed their bad paper along to others.)
• The characters in The Big Short weren’t just smart — they were also very, very lucky
There have been insane financial manias for as long as there’s been capitalism, and the housing bubble was preceded by the similarly sized dot com bubble just a few years before. So many, many people understood that the housing bubble existed.
In fact, some big financial players, including Goldman Sachs, Deutsche Bank, and the hedge funds Magnetar and Paulson & Co., made bets on the housing market similar to but far larger than those placed by the main characters in The Big Short.
The bubble was also recognized by Yale economist and housing expert Robert Shiller, who wrote of the “serious risk” of a “possibly worldwide recession.” Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., saw the bubble in 2002, and went so far as to sell his home and rent an apartment until the bubble deflated.
(While I didn’t own a house then, my parents did, and in 2006 I urged them to sell it and rent somewhere for a while. They didn’t, partly because they didn’t want to move, and partly because after I explained the logic to my father, he decided he “wouldn’t want to take advantage of other people like that.” He will never be a Wall Street bond salesman.)
But in order to make big money off a financial bubble, it’s not enough to understand that it will collapse. You also have to guess correctly about the timing of its collapse. While in the long run markets have some connection to reality, in the short run they have little connection to anything. If you guess too early or too late, you’ll be intellectually validated but bankrupt.
Moreover, as The Big Short illustrates, even guessing correctly may not be enough. Christian Bale’s character, a San Jose neurologist who quit medicine to become a money manager, loses investors who don’t trust his strategy of taking small, certain short-term losses for the potential of a huge payday later. If the bubble had taken a few more years to deflate, his company likely would not have survived long enough to get its eventual 400 percent return.
The reason it’s important to understand this is that the people most responsible for what happened don’t want you to. Take Alan Greenspan, who as chairman of the Federal Reserve during the bubble’s heyday possessed the most economic power of any single human being on earth, and could have punctured it with one strong speech.
In 2010, when Greenspan claimed on Bloomberg TV that “everybody missed it, academia, the Federal Reserve, all regulators,” he was specifically asked about the people featured in the book version of The Big Short who saw it all coming. Greenspan answered: “You have to ask yourself why would they make that judgment. The problem that you’re raising is a statistical illusion. … If you took 1,000 people and you split them into two and you had them toss coins against each other, when you get down to the last two guys, tell them that they don’t know how to toss coins.”
The second part of what Greenspan said was completely true — that is, correctly calling the timing of a bubble’s collapse is largely luck, and it’s unlikely anyone in The Big Short will be able to do it again as well with anything else.
But for Greenspan, that was also completely irrelevant. As Fed chair, he didn’t need to know precisely when the bubble would deflate, something that was essentially impossible. He only needed to know that it existed, something that could be figured out by anyone with a subscription to The Economist.
And this is funny: After Greenspan “missed” the housing bubble and caused the greatest economic catastrophe since the Great Depression, he was hired by John Paulson, a hedge fund manager who personally made over $3 billion off of it. As an additional demonstration of Paulson’s gratitude, he also took a tiny fraction of his winnings and endowed the Alan Greenspan Chair in Economics at New York University. Ha ha.
That said, there certainly were people who genuinely had no idea what was going on. In 2005 I interviewed Greg Mankiw, a schmancy Harvard professor who had just finished two years as chairman of George W. Bush’s Council of Economic Advisers. When I asked whether he believed we were in the middle of a housing bubble, he became extremely agitated by the idea that mere humans could believe they knew more than the all-seeing market.
• The people who shorted the housing market weren’t the good guys
The Big Short does a great job depicting the mixed motives of the characters played by Steve Carell and Christian Bale (and its other stars, Ryan Gosling and Brad Pitt), but it’s impossible not to root for them as they call bullshit on the entire financial industry. Moreover, in theory people who short markets perform a valuable function, making bubbles less likely by forcing prices of financial securities to stick tighter to their actual value.
But in practice, that’s only true in heavily regulated, publicly traded areas like the stock market. The characters of The Big Short were shorting housing via bespoke insurance from largely unregulated insurers like AIG Financial Products, which weren’t required to have enough money to pay out on any significant claims. Instead, AIG FP’s business model assumed that it would mostly just collect premiums. It was like a fire insurance company that was incredibly profitable as long as nothing ever burned down.
We know what happened to AIG when the fire began: Everyone who’d bought insurance from AIG FP showed up to collect their claims, making all of AIG instantly bankrupt — until the Treasury Department and the Fed joined forces to provide a $182 billion bailout. So all the money pocketed by the protagonists of The Big Short came ultimately from us. Without us, all their cleverly engineered credit default swaps would have been worth as much as a pile of Enron stock.
• For regular people, Wall Street’s nonsense was largely an irrelevant sideshow
First Wall Street exploded in late 2008 like a poorly maintained fireworks warehouse. Then everybody you know was laid off and hasn’t been able to find anything that pays as well since. So it certainly seems logical that the first thing caused the second — and that as maddening as the Wall Street bailout was, if things were this bad with it, without it there would have been a second Great Depression.
Except our own great recession actually began in late 2007. And the people telling us Wall Street’s collapse caused the whole economy to fall apart are the same ones who used to tell us that you could never go wrong by investing in real estate. Maybe it would behoove us, like it did the subjects of The Big Short, to look more closely at their story.
Dean Baker, mentioned above, probably got more right about the housing bubble and its effect on the real economy than anyone else. He makes a strong case that what mattered to ordinary people was simply that the housing bubble deflated, not the intricacies of how bankers inflated it in the first place and subsequently destroyed themselves.
As Baker explains it, our economic catastrophe was straightforward: At its peak, the housing bubble added $1.2-1.4 trillion in annual private sector demand to the economy, or around 10 percent of GDP. Part of this was extra homes being built employing extra construction workers, and part was that homeowners believed they were richer than they were and hence were more willing to spend money.
There was no easy way for the private sector to replace that demand, whether Wall Street had gotten a well-designed bailout that punished wrongdoers and cut banks down to size, the horribly designed bailout that we did get, or no bailout at all. (Moreover, the high-pressure sales job on the bailout relied on claims that without it we’d all be murdered by something called the commercial paper market. Even Treasury officials from that period have admitted that was almost certainly a fairytale.)
But there was a solution available: The federal government just had to spend a gigantic amount of money to replace that $1.2-1.4 trillion in annual demand. But Obama was never willing to ask Congress for enough, and Congress might never have provided it even if he had. Instead we got $300 billion of stimulus in 2009 and 2010, and then dribbles afterward. It shouldn’t be any surprise that everyone under 30 is still living in their parents’ spare bedroom.
This is the true cost of the housing bubble and Wall Street’s looting of our country. You often hear that the financial crisis destroyed, say, $14 trillion in housing and stock market wealth. This is wrong. By itself, the financial crisis destroyed little wealth. The $8 trillion in extra housing bubble “wealth” never existed in the first place; the crisis simply revealed that reality. And the stock market recovered fairly quickly, because that wealth was (mostly) real.
The actual price we’ve paid is that the U.S. economy has been operating far under capacity for eight years. The total value of the goods and services we could have produced but have not is over $7 trillion. That’s more than enough — about $90,000 for every family of four in the country — and as long as the economy remains depressed, it will keep accumulating, along with millions of broken lives.
Thus the real criminals are exactly who you think they are: Wall Street, plus the Republicans and Democrats who execute their orders. But the biggest crime they committed isn’t their spectacularly creative financial fraud. It’s been their absolute refusal afterward to allow us to use our own government to fix the disaster they created.
So now that you’ve seen The Big Short and read this, go see it again. Hopefully you’ll enjoy it even more the second time, and see its message even more clearly: The U.S. is run by an indistinguishable horde of Michael Palins, all nervously telling us that despite what it looks like, American democracy is just pining for the fjords.