The movie ‘Inside Job’ reveals how a few key players in the government, banking industry, and rating agencies basically gamed the system to their own advantage. It shows the unethical behavior that occurred such as greed, incompetence and corruption with Wall Street firms taking excessive risk with other people’s money without any personal consequences when it all got out of hand.
The documentary also looks at why these breakdowns weren’t predicted, what went wrong on an international level and where we’re currently heading to hopefully avoid this happening again in the future.
The film then elucidates the practices leading up to and chronicled during the Recession that ultimately led to its catastrophic effects. These included financial “innovations” such as collateralized debt obligations, buying junk bonds, and huge leverage positions (Ferguson 00:46).
The massive conglomerates also created confusion because when things went downhill no one knew exactly who owned what debt or stock (Ferguson 01:15). With so much money circulating in such a complicated system, it was extremely difficult to track any movement of capital which left an autruistic bailout plan as the only solution (Ferguson 02:10).
The now heavily consolidated sector of financial giants increasingly shifted its risk onto the government and away from itself, leading to ever more reckless behavior that resulted in increased economic instability (Stone 2).
Furthermore, the rise of derivatives trading markets allowed banks to make money off taking on additional risk without actually having assets or – even worse – understanding what they were investing in (Ferguson 00: 18-19). These combined changes facilitated a dramatic increase in leverage and derivative instruments like mortgage-backed securities (MBS) – once only used by sophisticated investors as hedging tools – available to all kinds of buyers with inadequate knowledge and understanding (Stone 5).
The repeal of Glass-Steagall was critical component in creating an environment where these widespread risks had room to develop into devastating problems. It dramatically decreased regulation that would have potentially limited the kind reckless activities seen done by firms at this time and those leading up to 2008’s banking crisis.
Instead, banks showed no reticence when it came to leveraging as much capital as possible while simultaneously underfunding liquidity reserves(Laeven & Valencia 12), setting up a system that any type event could blow apart entire segments our economy at unprecedented speed.
The growing derivatives market attracted large players such as hedge funds, insurance companies and banks like AIG who used them to increase the potential return on investments while creating enormous risks.
By 2008, the value of derivatives contracts that would fail exceeded even what can be called a worst-case scenario and ultimately exposed counter-parties or lenders to unprecedented losses. This was undoubtedly a major contributor to global financial crisis, only rivaled in history by the Great Depression of 1929.
It’s no surprise then, that during this era of heavy deregulation the market became largely unregulated and incredibly risky. A lack of proper checks and balances allowed derivatives to become an increasingly popular instrument within financial circles. But the reduction in rules left these products vulnerable to manipulation, fraud and instability—all things which have been witnessed during The Great Recession of 2008-2009.
There is little doubt that Larry Summers played a role in creating an atmosphere where unchecked greed ran rampant through Wall Street has been largely unsuccessful due to its reliance on short-term profits over long-term sustainability (Akers 14:46). Consequently, it was no surprise when The Great Recession occurred; deregulation had effectively allowed for too much risk with too few consequences leading up until the crash.
In the simplest terms, the idea with the loans was that they would be bundled together and sold as investment products. But instead of being compared to stocks or bonds, these CDOs were traded as if they had little risk. Consequently, this opened up a massive source of credit for homebuyers and drove house prices sky-high (Ferguson 02:18).
The film explains how lenders took advantage of loose regulations to write mortgages knowing full well that borrowers may not have been able – or willing -to pay those mortgages off (Ferguson 06:34). The result was an unsustainable housing bubble which eventually burst in 2008. As Ferguson explains in his movie, this caused “the worst financial crisis since the Great Depression” (Ferguson 08:36).
The rating agencies were also part of the problem, as they simply accepted the fees from the investment banks despite having full knowledge of how risky these investments actually were. This negligence allowed for even more unsuspecting public and private investors to come into play, investing in CDOs without proper transparency (Ferguson 00:50). Thus, the market was eventually flooded with illiquid assets that no one wanted or could afford which led to a horrifying financial crisis.
The process of CDOs was a huge part in the2008 Financial Crash and allowed investors to literally bet against certain mortgages. This, combined with more people having access to loans they could not afford, created an untenable situation when housing prices plummeted and many were stuck unable to pay back what they owed – leading to a wave of home foreclosures across America.
The resulting losses suffered by banks and individuals caused widespread panic that led to major government interventions such as the Troubled Asset Relief Program (TARP), enacted in 2008 on a historic level. The bailouts did help stabilize the economy but at great cost for taxpayers who now carry much of the burden for Wall Street’s mistakes.
The documentary also features interviews with MIT Professor Simon Johnson, who states that the recklessness of banks and government regulators in the U.S is comparable to developing nations such as Nigeria or Indonesia (Ferguson 02:34). He argues that the stability of these countries relies on a vibrant middle class, which is currently under assault due to deregulation practices allowing large firms to retain power while limiting opportunity for the majority.
The Inside Job goes further into investigating why this is allowed to happen by discussing how international organizations like the IMF and World Bank are complicit in disregarding financial soundness regulations and creating economic policies encouraging growth at all costs.
Ultimately, the film Inside Job tells a very succinct story of how we got to where we are. It does so in a concise and effective manner that accurately reflects each layer of the problem without overwhelming its audience. The complexity of the knowledge is unique and enlightening, revealing an often-unseen reality about how our economy runs as well as who benefits from it. Although understanding financial markets may seem complex at first, this movie provides some much needed insight into what happened to cause such a massive economic crisis.
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