One of the most widely anticipated films of the holiday season was released to big audiences and wide acclaim. It tells the tale of an epic battle between the forces of light and darkness, filled with arrogant but lovable characters, some of whom, despite their obvious flaws and shortcomings, redeem themselves by taking on and winning against an evil empire.
I refer not to ‘Star Wars: The Force Awakens’, but to the film adaptation of Michael Lewis’s book ‘The Big Short‘. It chronicles how a motley crew of assorted traders and fund managers came to understand the impending housing implosion, and discovered a novel way to make a bet on it. It isn’t a spoiler alert to say that the financial world collapses, the protagonists get rich and no one lives happily ever after.
The reviews have been mostly excellent – Rotten Tomatoes has the critics’ ratings at 87%; they call it a “scathingly funny indictment of its real-life villains”. Among moviegoers, it ranked at 90%; I loved the Lewis’ book, and to the extent the movie deviated by veering into some absurdist comedy, I’d give it an 80 or so out of 100. Perhaps the film ‘Margin Call‘ is a better Wall Street drama; ‘Trading Places‘ is certainly a much funnier movie. Regardless, it’s good wonky fun all around.
As someone who has studied the financial crisis, and written a well regarded (see this, this and this) book on the subject, I can say that the film gets the broad strokes of the crisis correct. A complex set of factors led to a unique bubble in mortgage credit, followed by a crash in valuations that almost took down the rest of the economy.
A small group of pundits have criticised the movie, claiming that the fundamental narrative is wrong. The government, they say, is at fault, because it forced banks to give mortgages to lower-income people who couldn’t afford them.
Barron’s blamed Bill Clinton, The Wall Street Journal blamed “uncertainty about how government would treat the biggest banks”, and Peter Wallison at the American Enterprise Institute went back to pursuing his white whale, blaming Fannie Mae and Freddie Mac for all that is wrong in the world.
Each of these arguments has been so thoroughly debunked over the years that they are not worth spilling more than a few pixels here. Yes, Clinton – and George W Bush after him – both promoted housing for lower-income families.
However, these were not the mortgages at the heart of the crisis. As my Bloomberg View colleague Noah Smith observes: “Housing bubbles manifested in many countries that had no equivalent to the government-sponsored enterprises Fannie Mae and Freddie Mac, the bubble was driven by middle- and high-income borrowers, and the borrowers who drove up prices were primarily speculators rather than owner-occupiers.”
These false claims, however, delight fans of cognitive dissonance, and they provide us with a textbook case of what occurs when facts intrude on an ideology that has failed real-life tests. Indeed, some of the people who helped cause the crisis are the biggest proponents of this counter-narrative: radical deregulators, free-market absolutists and others simply couldn’t accept the facts, and rather than change their belief systems, they simply refuse to reckon with reality.
The psychology behind this is well understood: the reason to ignore a mountain of facts aligned against an ideological narrative is the brain’s refusal to cope with the possibility that a deeply held belief system might be wrong.
Consider the many failed attempts to throw blame elsewhere: it was first directed at the 1977 Community Reinvestment Act, then the Federal Housing Authority, then Fannie and Freddie. Former senator Phil Gramm, who was behind both the repeal of Glass-Steagall and the introduction of the Commodity Futures Modernisation Act of 2000, to this day refuses to recognise the consequences of those two legislative blunders.
Back in 2008, I created a list of “who was to blame” for the crisis, and it included more than 30 institutions, individuals and legislative decisions. Many, many errors were made in the decades leading up to the credit crisis; to claim any one factor was the main cause fails to understand the basics of causation or complexity.
Those who ignore the heaps of data and evidence and repeat an unsupported narrative have not only failed to prove their arguments, they have revealed their own biases and ideologies. It might be a good way to get grant money from partisan donors and think tanks, but it is a terrible way to perform honest analysis.