Saturday, January 9, 2016

Gilded bubble bath and champagne

This afternoon I saw the movie The Big Short. About 2004 Michael Burry, a hedge fund manager. took a close look at the subprime mortgages driving the housing boom and the various financial thingies they were packed into. He realized the whole market was built on smoke and mirrors and as soon as all these adjustable rate mortgages started adjusting the whole mess would fall apart. So he went around to the various banks and asked for a deal that essentially made more than a billion dollar bet against the booming housing market. They all thought he was crazy so gladly accepted his money. A "short" is a bet that the price of something will fall. A trader at another bank got wind of this idea, realized he was onto something, and worked behind his boss's back to draw in other investors to bet against his own company. This includes a team at another company that decided to research the idea by actually visiting a new housing complex in Miami. They also placed bets. Two whiz-bang kids stumbled across the idea and also bet against the housing market.

Spoiler alert (though we've already lived through it): The rest of the movie is about how these four groups are ridiculed, then proven right as in 2007 the financial industry collapsed around them. The two kids made a daring bet, that the entire mortgage market would collapse, not just the subprime market. These kids did a happy dance over their own audacity and their mentor (played by Brad Pitt!) told them to cut it out – if their bet is successful it means the whole economy will collapse and that means millions of people would be out of work. That deflated their sails.

Along the way some of these arcane financial terms are explained in novel ways. One term is explained by a woman in a gilded bubble bath sipping champagne. Another is explained by a chef not throwing out the three day old fish, but making fish soup. Yet another is explained by a woman at a gambling table about to make a bet while two people behind her make a bet whether she will succeed at her bet and two more people make a bet on which of the first two will will their bet.

Throughout the characters talked about the fraud they were uncovering. The big banks were protected from the consequences of their fraud by the gov't bailout. Their fraud ruined the lives of lots of Americans. Only one low-level guy went to jail. Most of those who were responsible for the fraud are still in charge of the super banks and have so much money they can easily distort the political process to give themselves even bigger tax breaks.

I spotted in the credits the usual disclaimer, "The persons and events in this motion picture are fictitious. Any similarity to actual persons or events is unintentional." It didn't seem accurate. The IMDB goofs page for this movie didn't like it either. Michael Burry is a real person using that name, and a few scenes in the movie recreate events that actually happened. And even if individual scenes are fictionalized, the overall story is true and we're still feeling its effects today.

I've wondered what America would be like now if we hadn't bailed out the big banks in 2008. Yeah, the short term would likely have been a lot rougher. But in the long term I suspect the rebound would have been a lot faster and included more people. Wall Street wouldn't have continued to vacuum up money and distort the political process. It worked for Iceland.

More about our financial overlords (though this happened before the events in the movie):

Bryce Covert, writing for Think Progress, reports on research done by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. They looked into tax data and a few other things to figure out why after 1980 the income of the rich grew faster and the income of the poor grew slower than before when both grew at about the same speed. This research shows two sources for that difference in growth. First, the income of the wealthy shifted from wages to capital income – money made from investments, such as stocks. Second,, the tax rate on such income, the capital gains tax, was reduced. Yup, a reduction in a tax that only the rich pay.

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