The Inside Job
My wife and I just finished watching The Inside Job, a documentary about the subprime derivative industry and its cataclysmic impact on global markets beginning a few years ago and still rippling through the world’s economy today. Although most of it I had already read about in “The Big Short” and “All the Devils are Here” (the latter of which is an especially brilliant account of the whole story), the film did a great job of distilling it down into less than 2 hours. As with any documentary, editing and narration are used to further the thesis of the film, which sometimes feels a bit manipulative. Still, given my prior reading on the subject, the film really did basically hit the nail on the head, and even touched on what I believe is the core of the problem: failure to disclose, recognize and respond to disincentives throughout the financial industry, including academia.
The subprime fiasco has definitely challenged my belief that free market capitalism is the best economic system man has yet found. I still believe many of the problems came from the fact that we don’t have a truly free market economy (in which there would not have been an assumption that a bank, if big enough, would be bailed out no matter how mismanaged). Yet it seems that regulation is warranted when it comes to keeping incentives reasonable. After all, part of the problem was that bank executives, thanks to their cronies on their boards, got paid exorbitant paychecks for short-term profits, with no regard to where they were steering the company long-term. In theory, a free market would punish this sort of management by a lack of investors, but unfortunately the financial world isn’t as efficient a market as theorists would like to believe. There’s plenty of herd mentality at play, and plenty of examples where investors’ assumptions, enthusiasm, fear and hope overcome a truly honest assessment of the facts.
