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Inside Job: Afflicted by conflicts of interest, economists must share significant blame for the global crisis

Financial crisis causes | Inside Job: Afflicted by conflicts of interest, economists must share significant blame for the global crisis Ian Fraser

Charles Ferguson’s movie about the financial crisis, Inside Job, released in the US in October 2010, has finally made it the UK. I went to see the Oscar-nominated documentary last night - and was hugely impressed. I would recommend this film to any thinking adult, even if they profess to have zero interest in economics and finance.

The film, narrated by Matt Damon, is an angry piece of work. It uses a series of interviews with US bankers, economists, academics, regulators, politicians, commentators and other market participants - interspersed with archive and other footage - to expose the follies and foibles of the credit bubble.

In a review in Variety Rob Nelson said Inside Job is

"the definitive screen investigation of the global economic crisis, providing hard evidence of flagrant amorality - and of a new nonfiction master at work.

[...] Heard off-camera, Ferguson fearlessly grills a host of government and private sector bigwigs on what they knew and when they knew it. Repeatedly, the stuttering evasions of those interviewed - amid several requests for the director to stop filming - speak as loudly as words."

Ferguson, a former technology entrepreneur who sold his internet software business to Microsoft in 1996, reveals how a heady cocktail of hubris, self-delusion, corruption and greed led to practices including the securitization food chain which ultimately triggered the financial tsunami that brought the global economy to its knees in September 2008.

He shows how the seeds of financial Armageddon were sown by a series of deregulatory measures introduced by Ronald Reagan, Bill Clinton, George W Bush and Alan Greenspan - many of which followed relentless lobbying by the industry and cheerleading economists. And he also reveals an almost incredible truth - that many of the people responsible for triggering the crisis are still in charge.

The film -- whose full screenplay is available via Sony Classics -- has one or two blind spots. It doesn't devote much time to the City in London, fails to examine the multiple failures of the risk-management and audit professions, and largely ignores the bankers’ preferred “global imbalances” theory of what caused the crisis.

However, Inside Job brilliantly conveys the deceptive and alarming behavior of leading investment banks such as Goldman Sachs and Merrill Lynch, and of ratings agencies such as Moody's as they sought to mazimize profit from an asset class which was privately known to be 'crap' -- subprime home loans - in 2005-07.

It also exposes the absurdity of Wall Street’s remuneration system, which reward bankers and traders for taking reckless short-term bets but fails to penalize them when things go pear-shaped; and reveals how the cozy ties and the “revolving door” between Wall Street and Washington ensured that legislation and policy always went in Wall Street's favor -- and that there have been no prosecutions or even arrests of bankers or traders since the crisis.

Inside Job also reveals the astonishing truth that financial-political-regulatory ties have, if anything, intensified under President Barack Obama.

But the most dramatic sequences in the film come about two-thirds of the way through, when Ferguson lifts the lid on the little-documented role of the economics profession in stoking up a global financial crisis.

He alleges that several supposedly “academic” economists - including Larry Summers, Martin Feldstein, John Campbell, Glenn Hubbard and Frederic Miskin -  became corrupted.

Some of these economists took huge fees for consultancy and non-executive directorships from financial firms, whilst positioning themselves as though they were disinterested arbiters of the economic scene - and some also testified to Congress in favor of deregulation.

It appears from the film that Summers, now director of the White House National Economic Council, was used by the industry to give legitimacy to what were, in reality, flawed and dangerously out-of-control practices.

This sort of thing was overlaid by the prevailing “groupthink” of the credit bubble, which included blind faith in the power of derivatives to minimize risk - a credo that was impervious to warnings even from Warren Buffett and Raghuram Rajan - blind faith in neo-classical economics, and blind faith in efficient market hypothesis.

The two economists who come of Inside Job the worst are Mishkin and Hubbard.

In one excruciating but telling scene (see the above clip), Mishkin, professor of finance and economics at Columbia University, also governor of the US Federal Reserve from September 2006 to August 2008, is portrayed as an "economist for hire" - he is revealed to have taken a $124,000 payment from the Icelandic Chamber of Commerce in exchange for writing a glowing report on the Icelandic banking sector, published not long before it started to collapse in May 2006.

In this scene, and when Mishkin gives his reasons for leaving the Fed - "So, so, uh, that, uh, I had to, to revise a textbook" - I'm afraid that he comes across as an utterly hollow man. The Hubbard scene is, if anything, even better. Here I quote from Daemon’s Movies:

"One of Inside Job's most compelling moments occurs when Ferguson interviews Glenn Hubbard, the current dean of the Columbia University Business School and a former chief economic adviser during the Bush administration.

"On-screen the cornered Dean, who is strongly implicated in pushing the Bush-era policies that caused the system to implode, and who is called out for collecting hefty checks for shilling corporation-friendly economic ideas, bares his teeth and reveals that beneath the façade of the nerdy academic lies a vicious political animal, red in tooth and claw."

After Mishkin defended himself on the Financial Times Economists' Forum website, in October 2010, Ferguson responded:

"Many of the most prominent economists in America are now paid to testify in Congress, to serve on boards of directors, testify in antitrust cases and regulatory proceedings, and to give speeches to the companies and industries they study and write about with supposed objectivity. … Some prominent academics have close ties to financial services yet neither their university employers nor the journals in which they publish require them to disclose their conflicts of interest, their financial positions, or the relationship between their financial interests and the policy positions they take.

"It is time to end this."

The individual who comes out best from this remarkable film (other than the likes of Rajan) is Andrew Sheng, chief advisor to the China Banking Regulatory Commission. Early in the film he comes out with the classic line "They were having massive private gains at public loss" and then right at the end he asks:

"Why should a financial engineer be paid four times to a hundred times more than a real engineer? A real engineer builds bridges; a financial engineer builds dreams. And you know, when those dreams turn out to be nightmares, other people pay for it."

Further reading on flawed thinking about derivatives and the causes of the global financial crisis:

Tags: asset price bubbles , banking , derivatives , financial crisis , Iceland , US
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