Micheal Lewis, author of "The Big Short," during an interview at UC Berkeley's business school, remarked, “It’s not that bankers and investors on Wall Street are inherently bad, but rather that the system itself is rotten. Replacing the 'bad guys' with 'good people' won’t solve the problem, as a corrupt system will corrupt the good.”
"The Big Short" brilliantly conveys this central idea, emphasizing that the issues with Wall Street and the financial system were the root causes of the century's biggest financial crisis.
To grasp the problems in the system, we need to explore the ideas of capitalism and financial investment. In his book "Sapiens," Yuval Noah Harari explains the difference between modern and premodern economies. In pre-modern times, the flow of money went in one direction – from production to profit. But in modern economies, there's a cycle where profit, when put back into production, generates more profit. Credit is crucial in this process because it represents investors' trust in the productive use of their money. Initially, capital investments were in business development and overseas expansion, and the first stock exchange started in Belgium in 1531. Similar institutions popped up in Germany, England, and France in the 17th century.
The first financial crisis, known as the Mississippi Bubble, happened in the 1720s in France under John Law. Law held multiple key positions – heading the Mississippi Company, serving as the central bank, and being the finance minister. The company's stock, supported by the French government, shot up, but smart investors sold off at its peak, causing a crash that left both the company and the French government in huge debt. To tackle the crisis, Law printed a lot of money, leading to the collapse of the French economy.
The 2003 stock market, much like the Mississippi Company, soared under economic stimulation by the Federal Reserve, which lowered bank interest rates to 1%. Greedy banks and financial institutions, bypassing credit checks, offered loans with virtually no prerequisites. William Black, a professor at the University of Missouri, referred to these unsecured loans as "Liar’s Loans." These subprime mortgages were then packaged into complex financial models by Harvard, Yale, and MIT graduates, and sold as attractive financial derivatives, including Collateralized Debt Obligations (CDOs), to major investment institutions.
These subprime loans were transformed into desirable financial products thanks to financial wizards and credit rating agencies. In "The Big Short," when Mark and his partner question how junk loans received a triple-A rating, they’re told that if one agency didn’t give the rating, another would. The revenue of these rating agencies came from the companies they assessed.
As for regulatory agencies, the FBI had warned about the situation as early as 2004 but only issued a warning. The head of the SEC, Gaithnar, later justified inaction by claiming the fraud was too severe to manage. This inaction was partly due to the repeal of regulatory laws under the influence of those benefiting from the system.
The 2008 crisis resulted from a collusion of banks, financial institutions, rating agencies, and regulatory bodies driven by mutual interests. Michael Moore's film "Capitalism: A Love Story" blatantly points out the complicity of congress members and regulatory chiefs in the crisis.
"The Big Short" portrays the absurdity and darkness behind Wall Street through investors who saw through the housing market bubble and made a fortune by betting against mortgage derivatives. The film, with its stellar cast and compelling narrative, encourages profound reflections on human nature, the system, and capitalism itself.
Brian S. Wesbury, the Chief Economist of the USA, asserted in a TED talk that the primary cause of the 2008 crisis was the Federal Reserve's consistent interventions. According to his perspective, a free market, devoid of government interference, could have averted the crisis. This viewpoint, grounded in Adam Smith's principles, appears to neglect the inherent aspects of greed and ruthlessness associated with manipulating capital and markets. It suggests a tension between the ideals of a self-regulating free market and the complexities introduced by human behaviors and motivations within the financial landscape.
The government intervened by using taxpayers' money to bail out the banks, and in the aftermath, Wall Street elites swiftly reclaimed their dominant positions. Lewis noted an intriguing observation: a scarcity of truly content individuals on Wall Street, with few willingly choosing to depart from the industry.
Consequently, the narrative unfolds, shedding light on the persistent struggle within a system where the straightforward replacement of flawed elements with virtuous ones is no longer a feasible solution.
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