As I wrote last week, the most important film in the 2016 Oscar race is The Big Short. Why? Because it translates a very complicated but incredibly relevant subject (the derivatives market and how it crashed the global economy in 2008) into a language that mainstream America can understand.
But how does the film hold up when scrutinized by an economist? Does it dilute its subject matter too much? Does it miss many important facts? Is it misleading hundreds of thousands of American moviegoers (at this point, the film has grossed almost $60,000,000)? For some answers to these kinds of questions, I turned to Seattle-based and Seattle-educated economist Alan Harvey. He has published an excellent little book Demand Side Economics: Demand Side Minds and is the executive director of IDEA Economics, an organization that counts some of the most famous heterdox economists in the world (Ann Pettifor, Michael Hudson, James K.Galbraith, for example) as its members.
Harvey:“Let's begin with what the film really got right: the venality and predation of Wall Street. But the subprime crisis [decribed in the film] and the consequent crash of 2008 was only the latest in a series of Wall Street-related crashes. The S&L fiasco and the dot-com frauds being in recent memory. In this case, however, everybody got greedy, and you are a happy man today if you did not. There is also the stripper in the movie. She is the everyman. Get a house, flip it, or just milk the equity as values rise. ‘Housing never goes down.’ You may remember that you were an idiot if you didn't get on that train."
That said: "There were economists who predicted the crash, notwithstanding the official line 'Nobody saw it coming.' These economists were looking at the same thing the characters in the film were looking at: the debt. Steve Keen, for example, predicted the crash based solely on the level of private debt, which peaked at upward of 180% of GDP. That was unprecedented, challenged only by the run-up to the Great Depression. Keen identified it as a Ponzi boom, financed by ever-increasing house (and hence collateral) values. Very curiously, private debt does not concern most mainstream economists."
Finally [SPOILER ALERT]: “The movie concludes with the idea that Wall Street has diverted blame from themselves to the poor and to immigrants. While this is partly true, the principal fall guy has been government. Blaming government for the crisis for its facilitating loans to the poor. Never mind that, as the movie shows, private lenders had no problem with NINJA [No Income No Job no Assets] and no-document loans. But blaming the run-up in government debt for the subsequent recession, as well. Even though the federal deficit ballooned only after the crisis, making a serious timing problem if it was the cause. Government debt grew as a response to the crash, not as a cause."