The Big Cover-Up
The Big Short consistently skirts any mention of the underlying cause of the [financial] crisis. They [the producers] created their story under the self-accepted censorship of the Liberal-Left party line, without which Michael Lewis’s book could not have become a runaway best-seller.
The Big Short: Inside The Doomsday Machine, the movie based on Michael Lewis’s best-selling 2010 book, was released on December 23 and promises to challenge attendance records. Since I am familiar with the book, I expected to endure rather than enjoy The Big Short. Nope, I enjoyed it. Probably it deserves some of the enthusiasm of audiences—provided that your only criteria are effective storytelling, tight drama, and, above all, cinematic skill equal to its subject’s challenges.
The Big Short purports to tell the story of the financial crisis that exploded into the headlines in 2007, shook the foundations of financial markets worldwide in 2008—including a sickeningly steep stock-market crash—and ushered in what is called “the Great Recession,” which gutted the housing market and employment for years. The response of government in the United States was the largest “bailout” in the history of investment banks, brokers, and the banking system—and an “easing of credit” by Federal Reserve money creation—pure inflation—and interest-rate manipulation unprecedented in U.S. history. In the process, Wall Street legends like Bear-Stearns and Merrill Lynch simply collapsed.
Notice that I have described the storyline of The Big Short in very general terms, as non-technically as I can. But to even begin to grasp the simplest mechanics of this catastrophe, you must understand “subprime mortgages,” “mortgage-backed securities,” “tranches” of bonds with different credit ratings, insurance against credit risk by means of “credit default swaps,” the role of “credit default obligations,” and percentages of mortgage default permitted for bonds with different “safety” ratings.
I enjoyed it. It deserves some of the enthusiasm of audiences—provided that your only criteria are effective storytelling, tight drama, and, above all, cinematic skill equal to its subject’s challenges.
To grasp these are essential to even a minimal understanding of the racing action in The Big Short. Alas, polls consistently report that very large percentages of Americans, at least, do not understand such concepts as “compound interest” or why prices of existing bonds go down when interest rates go up. But you are faced with the risk of making a movie incomprehensible when the audience has no grasp of subprime mortgages and credit default swaps. Oh, and you must keep your audience’s attention locked on the big screen.
I am tempted to describe this movie’s handling of that challenge as “brilliant.” It is not brilliant; it is exceedingly effective, though screamingly obvious. I suppose that is why The Big Short is characterized as a “drama-comedy.” I will return to this topic.
The Big Short accepted another challenge: To tell the truth about the causes of the financial crisis of 2007-2008. Yes, the movie tells the story of a few men who penetrated the mass delusion of the entire financial industry as the crisis developed, saw the catastrophe hurtling down on the financial system, and made daring bets—“shorts”—to make fortunes out of that catastrophe. But as it tells that story, the movie unmistakably assures us that this is the real scoop, the real dope, about the causes of the crisis.
The Big Short so totally fails to keep that promise, so consistently skirts any mention of the underlying cause of the crisis, that the producers might have been operating under strict censorship, which of course they were not. They created their story under the self-accepted censorship of the Liberal-Left party line, without which Michael Lewis’s book could not have become a runaway best-seller and the movie a hit.
As The Big Short unfolds its racing narrative and the protagonists come to curse the authors of the disaster, and as the movie ends with the epilogue text running up the dark screen, we hear investment bankers, stockbrokers, and rating agencies condemned as pure frauds—criminals who should not have escaped jail. We never once—I know that this defies belief, given what has been published about the crisis—we never once hear government mentioned. Not the Federal Reserve, not the government-created, government-backed Federal National Mortgage Association or the Federal National Mortgage Association [Fannie Mae and Freddie Mac], not the legislation pressuring banks to make subprime loans. Not one word. A Martian somehow hearing and understanding this movie would not know that government existed—except for a few mentions of how government regulatory agencies were asleep at the switch. Capitalism, the private sector, through greed, stupidity, and sheer denial, brought on this epic collapse of the U.S. economy and endangered the world financial system, which had to be saved by governments.
It is impossible to see this as an innocent error. Perhaps in 2010, when Michael Lewis published his book—possibly, and I am stretching, here—a writer might have focused on the direct, immediate locus of the tragedy and missed its essential cause. But by 2015, when this film was completed and released, dozens of books and articles had laid out explicitly, irrefutably the role of government as enabler of the crisis. I might mention the account by a leading banker, John A. Allison, who went through the entire experience, managed his bank to save its depositors from the disaster, and then told the story in The Financial Crisis and the Free Market Cure [McGraw-Hill Education, 2012]. There are many other accounts, such as “Who Really Created the Global Financial Crisis”? The Big Short is told as though they do not exist.
Not mentioned in The Big Short even by passing reference are:
The role of the Federal Reserve, chiefly under Alan Greenspan, which supplied virtually unlimited credit to the financial system over decades, so that built-in free market limits on availability of capital were swept away and the bubble could enlarge without limit.
The role of Fannie Mae and Freddie Mac, government created and “sponsored” agencies, putatively private, which with Congress’s special dispensation were able to package and sell mortgage-backed securities without limit, becoming the majority purchasers of these toxic instruments so that the “private sector” had funds to create more.
Federal legislation intended to protect potential homeowners in “redlined” districts—where mortgage default rates were sky high—by mandating that banks give them special consideration for mortgages: That is, to approve “subprime” mortgages.
Those are but three roots of the financial crisis, the stock-market crash, and the Great Recession. Yes, the banks, real estate brokers, investment bankers, and stockbrokers enacted this tragedy, creating the illegitimate securities, faking the safety ratings, and blinding themselves to the fast-and-loose dealings.
And so the “explanation” of the crisis has been: Greed. But “greed” always has been with us. It does not change, just as human nature does not change, and “greed” has been identified with self-interest, the pursuit of profit, the desire to succeed. It has been identified as the engine of creation, innovation, and prosperity. So why, leading up to 2007, did these ever-present motivations of traders generate a once-in-a-century tragedy?
The answer, in brief, is that government was the enabler. It created the unlimited credit through the Federal Reserve, provided huge leverage for purchasing the securities through Fannie and Freddie, and pushed the banks to relax standards of mortgage lending. The story, of course, is far, far more complex than this. I would recommend Mr. Allison’s book and, in fact, my own much shorter book, Not Half Free.
Well, what of the story that The Big Short does tell, at best a half truth, but a good yarn? Three tiny groups of men, who against the overwhelming consensus of the financial industry perceive the unsustainable bubble and bet their futures that they are right. These are the heroes of The Big Short. As they are laughed at, threatened, and utterly dismissed—but persist in risking their fortunes and careers on their independent judgment—they manifest perhaps the most heroic of human traits: Reason. Reason based on logic, firsthand examination of the facts, and the strength to be impervious to all other considerations.
Well, what of the story that The Big Short does tell, at best a half truth, but a good yarn? It is a truism that Wall Street loathes and ridicules anyone who dares take issue with its permanent campaign to advertise a positive market for stocks and bonds. All of this scorn, literally giggling but often thunderous wrath, shouted curses by red-faced big shots, is turned upon the few individuals who say: This delusion must end in tears.
It is a truism that Wall Street loathes and ridicules anyone who dares take issue with its permanent campaign to advertise a positive market for stocks and bonds. All of this scorn, literally giggling but often thunderous wrath, shouted curses by red-faced big shots, is turned upon the few individuals who say: This delusion must end in tears.
The overarching challenges confronting the producers of The Big Short are to explicate the key technical concepts of the investment bubble without interrupting the headlong story and to make believable the discovery by the heroes of the full, fraudulent, and cynical game that threatens the world financial system and the lives, homes, and futures of millions of ordinary Americans.
Hedge fund manager Dr. Michael Burry of Scion Capital [played by Christian Bale], the pioneering mind behind the big short, provides nonstop entertainment dressed in T-shirt and sandals, and blasting thunderous rock music in his office. This socially awkward loner with one glass eye, remote and unperturbably serene—the real Burry has Asperger’s syndrome—is set against the permanently outraged Wall Street investor and crusader, Jared Vennett [played by Ryan Gosling, a one-time star of Disney’s Mickey Mouse Club], who storms through two years of discovering the scope of the deception and waiting for the big short to pay off. All the bright lights of The Big Short are based on real Wall Street figures who, indeed, made some remarkable calls about what was going to happen and bet on their judgment. Two young men who founded Cornwall Capital in a garage, and parlayed $110,000 into $120 million in the crash, supply the movie with its appealing California entrepreneurs [played by Finn Wittrock and Rafe Spall].
All leading characters in this film, by the way, carry the names of real people, lending the movie a certain sense of authenticity. Too bad some of the government movers and shakers behind the catastrophe are not portrayed and their real names are not used. Of 16 actors featured in the film, only one, Margo Robbie, portrays a minor Securities Exchange Commission regulator—and not a real one. We meet her briefly, and briefly clad, beside a pool in Vegas.
Most obvious are extravagant, often comic devices for explaining financial concepts to viewers. First is the blonde in the bubbly hot tub, drinking champagne, who explains subprime mortgages. Hey, how did she get in here? No explanation needed. Twice we are ushered into strip clubs, where we come to understand the lax or nonexistent standards for home mortgages—in one case explained by a lap dancer doing her thing. When we seek an explanation of leveraging-up by means of credit default obligation, we are at a blackjack table in Las Vegas with an economist and his pretty sidekick.
Between these egregious devices, which nevertheless accomplish their purpose, the nonstop action in offices of Wall Street and on the streets of Manhattan—a twitching, cursing, argumentative action accompanied by rap music or a heavy-metal rhythm—is intended to sustain our pulse as our heroes debate tranches of AA and BB mortgages. It At least, it worked for me.
My standard for “working” is not that by some miracle this movie kept my attention; the subject interests me and I grasp the technicalities. My standard is that I effortlessly kept focused on the plot, on what was being explained, and, above all, on what was at stake. There is much high moral dudgeon in The Big Short. The revelation that shakes and appalls the protagonists is that this is pure, smiling, hypocritical fraud: That the players involved are “the lowest shits.” Apparently, there were no shits in government except regulators asleep or awake in bed with the financial industry. That certainly contributed to the crisis, but the movie implies that government did not cause the crisis, it merely failed to prevent it. Hollywood has joined the financial regulators in the blame game, which is to set up Wall Street high-fliers (who notably do not donate to the Liberal cause) as the Fall Guys, as “The Fall Guy is in Place for the Next Financial Crisis” explains.
In the end, The Big Short engages us with a literal handful of individuals in the vast financial industry who stand against the intimidating consensus, hanging onto their shorts with increasing panic as week after week “the system” props up the prices of securities that ought to be plunging. The movie makes it easier to root for these characters because in the end we are assured that they take no pleasure in profiting from America’s disaster.
The review in the New York Times concludes: “The Big Short will affirm your deepest cynicism about Wall Street while simultaneously restoring your faith in Hollywood…”
Hollywood has joined the financial regulators in the blame game, which is to set up Wall Street high-fliers (who notably do not donate to the Liberal cause) as the Fall Guys, as “The Fall Guy is in Place for the Next Financial Crisis” explains.
How perfect for the Liberal-Left in the fracas called “the election season.” Because the Times writer might have added what is obvious: “And make you think hardly at all of government” in connection with the crash, eight years of economic pain, tidal wave money creation by the Fed, trillions in new Federal government debt, and a regulation-induced sleeping sickness in American banking. The candidate who looks best through the distorted lens of The Big Short is the frankly anti-capitalist, egalitarian, class-warfare candidate, Bernie Sanders.
You don’t suppose that could be deliberate? Michael Lewis’s politics are not on his sleeve. In some long interviews he has not elaborated his political position, except to say that he “leans Democratic.”
Nor is Lewis an advocate of government as the first solution to any problem. He said in one interview:
“The effect of a lot of the regulation has made it harder on would-be-competitors who could challenge [Wall Street behemoths]… And Dodd-Frank throws decisions to the regulators, and then that discussion ends up being run by banks. I just hate it. I have given up on the government.”
He has not failed to grasp how often government corrective action makes things worse and how crony capitalists routinely co-opt the regulators to enhance their own power.
I end with this question: Why do so many brilliant, wellinformed, and well motivated Liberal-Leftists fail to see what to champions of laissez-faire capitalism, often “Libertarians,” seems obvious at every turn: That political power wielded by bureaucrats—the power to coerce—reliably and fatally distorts the magnificently self-regulating, self-correcting expression of human reason, choice, and valuing called “the free market”?
This self-inflicted blindness, as Libertarians might say, leaves statists cheering The Big Short for ratting out the evils of “unrestrained” capitalism. It leaves advocates of laissez-faire shaking their heads, asking how an entire narrative illustrating the climactic collapse resulting from government interventions can fail for two hours even to mention government.
Arguments as enduring and recalcitrant as this one never are about matters such as business and regulation, where the facts are too evident. They are arguments that reflect profound differences in morality, in judging human nature, and in good and evil.
Only one thinker in our era has penetrated this conflict to its source in philosophical disagreement—even if most of us do not explicitly identify and articulate such premises.
Philosopher and novelist Ayn Rand, in Atlas Shrugged and Capitalism: The Unknown Ideal, demonstrated that at the root of our dichotomous views of political economy is acceptance or rejection of the religious and philosophical morality of altruism—the doctrine that man has no moral right to live for his own sake, his own benefit and happiness, but that moral stature is won by sacrifice for the good of others.
About this philosophical question I will say no more, here, but observe that condemnation—and explanation—of the financial crisis typically was compressed into one word: Greed. “Greed,” of course, is not a crime, nor a fraud, nor investment malfeasance.
And yet this one term has dominated government, media, and popular conversation about the crisis. Do you see how this alone guarantees that only the role of businessmen and corporations would be considered as culpable? Because, of course, government factotums never seek monetary profit, and so the concept of “greed” is inapplicable. If “greed” is our explanatory concept, then government, you see, is irrelevant.
And so we have the baffling worldview presented in The Big Short.
About the Author: Walter Donway
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