March 28, 2011

"Inside Job" and the 2008 Financial Crisis

By Hal Mansfield

A stunning overview of how the financial crisis of 2008 developed, inflated and finally burst is presented in the Academy Award winning documentary, "Inside Job," which was produced, written and directed by Charles Ferguson and narrated by Matt Damon. After a rather disappointing "run" at selected theaters, it is available for sale and rent in DVD format.

Using comprehensive, wide-ranging interviews and carefully documented information, "Inside Job" places the blame for the collapse and subsequent financial crisis squarely on the shoulders of the leaders of the major Wall Street firms, the key investment banks, the financial rating businesses, Federal Reserve Bank officers, government regulators, the Congress of the United States, several internationally known economists from major universities and the highest elected and appointed officials in at least four presidents' administrations.

To no one's surprise, none of the CEOs of any of the Wall Street firms, or the banks, or the insurance companies or the sub-prime lending companies agreed to be interviewed for "Inside Job." In the face of extensive questioning before Congressional committees, none of the major principles admitted to any wrong doing or even indicated that they knew that what they were doing was morally wrong, unethical or illegal. And, none of them hinted that they knew they were involved in inflating the largest and most dangerous financial bubble in history. To their credit, a few "lesser lights" and a couple of economists who could be considered culpable showed up before the "Inside Job" cameras, with what -- from their perspectives, obviously I think -- turned out to be discomforting results.

The titans of Wall Street and the Washington Bigwigs had plenty of solid notice that the housing bubble would burst and that the financial industry and the banking system was headed for collapse months before that happened. Several speculators who "bet against" the madness made millions by doing so. Several who wrote about the collapse but were largely ignored by the mass media, the public and investment portfolio managers have since become internationally recognized for predicting the collapse and trying to alert the public about what was going on and how dangerous the prevailing mania for the world's economy was.

Ego-driven hubris and an unbending desire to keep the huge profits pouring in combined to ensure that none of the warnings were heeded by those who could have acted in ways to avoid the disaster or at least reduce its impacts. There is some evidence that the culprits knew the government would bail them out.

"Inside Job" establishes that, over a period of 30 years, financial industry and government regulation of Wall Street, the commercial banks, the real estate markets, banks, the financial service industry and insurance sectors was reduced through changes in laws, regulations, rules and through neglect on the part of the regulators. In other words, Laisse Faire practices were carried to the extreme.

As a result of this 30-year trend, we saw the Savings and Loan scandal of the late 1980s; the dotcom disaster of 2000; and finally and almost 'fatally' for the world's economies, the housing, stock market, banking, and financial service sector collapses in 2008.

The Bush II administration's $700 billion bail-out in November of 2008 averted the greatest financial crisis in the history of the modern world and a world economic depression of unimaginable depth, breadth and consequence. No doubt about it. That bail-out was timely and necessary. Similar bail-outs by other major economic powers occurred around the world and also helped lessen the catastrophe.

Because of a lack of broad citizen concern or understanding of the causes of the collapse, there was far too little unified pressure brought to bear on the Congress or on either the Bush II or Obama administrations for substantive change in relevant rules and regulations to occur. In the Congress, party differences precluded changes in the appropriate laws. Consequently, not enough has changed.

The picture that emerges throughout "Inside Job" is that of a system that is broken because of 30 years of changes in regulations and laws and because of indifference to the rule of law and to common economic sense and accepted investment practices. This is seen, most dramatically, in the sub-prime lending arena and in the extreme risks that were taken with debt on the part of the Wall Street companies, the investment bankers and those companies that provided insurance for the overly risky investment strategies and practices.

Sadly, the Obama administration has not advocated or put in effect substantive changes in the laws, or in the regulations, practices, rules or personnel that could materially alter the culture of greed and risk that led to the disaster. To the contrary, Obama and his economic team, some of whom were involved in inflating the bubble, more or less accepted the status quo.

Since the meltdown in 2008 and the subsequent $700 billion government bail-out of the "too big to fail" Wall Street firms, commercial banks and investment insurance houses, have continued the culture of greed and wealth accumulation of the few at the expense of nearly everyone else. If anything, the worst of the practices have accelerated.

We all know that accelerants fuel greater conflagrations.