It starts with shots of intact Icelandic landscapes. In early 2000s the country finalised reform of its financial sector, which consisted mainly in deregulation. Until mid-2008 Iceland received glowing praises for the reform, which, as said by economists, strengthened the country’s financial stability and accelerated its economic growth. In fact deregulation of financial institution in Iceland gave rise above all to excessive credit expansion and, eventually, to an ultimate collapse of the country’s banking system.
This is just the prelude to another story told about the recent economic crisis. Clever, bright, yet not leftist and not politically involved. Some claim it does espouse leftists views on economy, but I did not discern it. If the film calls for something, it is surely not a revolution that would overturn the current unbridled capitalism, but for reverting to traditional capitalism, based on freedom, responsibility, playing by the rules and straightforward decency.
The main thesis the film sets out is that the financial industry in most developed countries has been allowed, by politicians and economists, to spiral out of control, then, by means of privatising gains and socialising losses, led to the recent crisis and went unpunished. The work, divided into five parts, explicates mechanics of events and decisions in the run-up to the crisis. I do not know if the way facts are presented is clear enough for a layman, but for me it seems the job has been done well.
Part 1: How we got there.
Filmmakers have come up with a theory that since the end of the Great Depression, until early 1980s when Ronald Reagan was sworn in as US president, the United States did not see any major economic crisis. This success, in fact untrue, since early 1970s saw oil crises, bringing about periods of stagflation, that put the era of Keynesianism to the end, is put down to the strict regulation of banking industry that prevented financial institutions from growing big. It was after Ronald Reagan took over and pressed ahead with his doctrine of Reaganomics when deregulated financial industry began to distend.
Two last decades of the 20th century saw two financial crises triggered by deregulation – S&L crisis and the dot-com bubble. The former is thought to have been caused by excessive law liberalisation, the latter by simple lack of integrity. The film brings back commonly known, exposed by the press, examples of stock market analysts saying privately the dot-com stocks they had valuated at sky-high prices were just junk.
The end of the previous century brought also much more tie-ups between business and politics. Transfers from positions of CEOs of big investment banks to positions in state administration and the other way round became the order of the day. Number of lobbyists hired by financial industry to protect its interests soared. Belief in self-regulation of the financial industry became an officially recognised doctrine.
Part 2: The Bubble
Around 2000, deregulation was full-blown and any attempts to bring some markets under supervision met stiff resistance from financial industry, backed by officials from FED, at that time chaired by Alan Greenspan, an remorseless advocate of deregulation. One of the proposals eventually rejected around 10 years ago was the one to oversee derivatives market. Personally I’m in two minds about this. Derivatives are like axe, itself good, good when you use to it to chop wood, but evil when you use it to kill your mother-in-law. Derivatives can be used for transfer of risk, hedging and speculation. Two first purposes seem safe, but usually derivatives were used for speculation and this sparked the whole turmoil in the recent crisis.
Those who have never dwelled on the mechanism of mortgage lending in the US in early 2000s are recommended to see the part clarifying how this all happened. The same part brings up the ever-lasting issue of risk vs. return trade-off. So either you grant loans to creditworthy borrower and make safely small profits, or give risky loans and cash in more, as long as they perform. You just cannot circumvent this!
The film reminds that one of the causes of the crisis were flawed remuneration schemes that put emphasis only on performance, regardless of risks taken. Risk-adjusted salaries and loss-sharing together with profit-sharing before the crisis could have mitigated the aftermaths of the financial meltdown.
Very remarkable is the last episode of this part in which a psychologist tries to examine the specific features of a typical banker’s personality. As you would have thought this an alpha male, compulsive risk-taker, inconsiderate, acting on the spur of the moment. Such types were much desired by banks and still are, since only thanks to their bravado profits of banks in good times could be that high and banks did not spare money to finance entertainment for them…
Part 3: The Crisis
Begins with the face of Ben Bernanke and his utterance from mid-2005 in which, when interviewed by a journalist of one of US TV stations, he claimed there was very tiny risk that there was a tremendous housing bubble and found it improbable that bursting of it would plunge the whole country into a recession. Several economist claim to have warned Bernanke of the impending disaster but he would always shrug off those warnings. Deliberately?
His pronouncement coincided with the peak of the housing bubble. The film indicates a direct cause why it burst and it is strikingly simple – the housing market run out of suckers who wanted to buy houses at exorbitant prices and financial markets run out of suckers who wanted to buy securities backed by lousy mortgages.
Then comes another commendably clear explanation of how financial crisis spilled over into real economy. Finally, the makers conclude that, as always, those who suffer the most are not those guilty, but the poorest. The bailout programmes rescued big financial institutions (as an economist I realise it was cheaper to help them out than to let them go bust and the whole plan was purely pragmatic) and left millions of ordinary people unaided. This is again symbolised by empty houses, may this bleak sight serve as a symbol of human folly and may it caution others not to repeat the same mistakes.
Part 4: Accountability
What accountability? Current “crony capitalism” is based on lack of responsibility. Either I win or you lose. What a game! Fortunes of banks CEOs who brought institutions the had run on a brink of collapse are intact. Bankers got away with punishment. If someone went to jail, it was only for fraudulent activities. In 2008 and 2009 correlation between remunerations and performance and financial standing of managed institution was totally disrupted.
The film also lays bare the hypocritical take of financial industry on deregulation. Prior to the crisis they were against, in autumn of 2008 when financial tsunami was about to wipe out the whole industry they called for tighter regulation, and when in 2009 the worst was over again they returned to their previous stances.
The crisis has changed nothing. Financial institutions are bigger and more powerful than ever before.
At the end, the film outlines several tie-ups between renowned academics from best business schools in the US and the financial industry. The study of economics, as carried out by people financed by the industry and who get well-paid jobs there, is described as “corrupt” and indeed conflicts of interests are visible… Should we believe scholars then?
Part 5: Where we are now
I am thankful, again, I do not live in the United States. Level of inequality in the US society is continually increasing, while social mobility is decreasing. In Poland, by sheer hard work, it is still possible to rise from rags to riches. Many poor people in Poland still can afford to get in to university and break away from poverty. In the US it is out of reach. The US economy has made a huge shift towards innovativeness and high-tech. Jobs in new industries require good education which, due to its costs, is out of reach for more and more Americans. In Poland financial institutions are not powerful, their power is as big as it should be, maybe except for Pension Fund Managing Companies, which showed how to defend their interests during the debate on pension system earlier this year.
Filmmakers also blame the “culture of going into debts” for the crisis. Media and financial institutions, as they claim, have incited people on consumption spree, brought them into troubles and profited from their misery. Also limited access to higher education is said to be one of the reasons why people run up huge debts.
Barack Obama’s presidency turned out to be a big letdown for all those who had hoped for the CHANGE. He went back on the promises to curb excesses of the financial industry. European government somehow managed to tackle the issue, Mr Obama failed.
The film ends with a lovely conclusion: Real engineers build bridges, financial engineers build dreams. Many people dreamt of their own houses. Their dreams have turned into nightmares.
Personally I have two main reflections after watching the film.
Firstly, if so many people “declined to be interviewed for this film”, are their consciences not clear?
Secondly, I could not resist the impression that many people who agreed to be interviewed mastered lying through their teeth to perfection. This is an immensely useful ability in the contemporary world. Sadly…