A Theory of Moral Resentments: An Inside Job
“How come?” asked by Charles Ferguson who wrote and directed the documentary Inside Job.
When I watched the award winning film Inside Job, it reminded me of reality TV. It’s real, however not quite the truth…but I am getting ahead of myself. Now to the movie.
The plot centres around 5 main groups of characters. They are:
1) The economists who saw the crisis coming and couldn’t stop it. These economists have righteous indignation for those who are to blame.
2) The economists who consulted for the financial sector and didn’t see the crisis coming. They are blamed for the financial meltdown because they were unethical in that they worked for the financial giants but didn’t reveal that they made money for that work. This conflict of interest is considered the root of all evil.
3) Non-economists who worked for the financial sector in some way (ie lobbyists, and CEO’s), made an unbelievable amount of money from the financial sector and got bailed out by the taxpayer in 2008. They are unethical because they made megabucks when others lost so much. The movie gives a case for why these elite should go to jail for ‘stealing’ that money.
4) Politicians and regulators who manage the financial system and had build their careers and networks inside investment banking. They can’t be trusted because of these connections.
5) Victims of the crash–whether big or small– who through no fault of their own were left picking up the tab or trying to get their lives back in order.
Between interviews is footage from public hearings where government officials interrogated the various CEO’s of financial institutions as well as many photos of economists who advised or were appointed by Bush, Clinton and Obama. Many of these folks declined to be interviewed.
It really is a must see for anyone interested in the financial crisis because the movie captures the public sentiment about the key players so well. As I watched it, I became embarrassed by the ethics of many of the economists. In fact it made my skin crawl. Having said that, I don’t think Charles Ferguson actually answered the question “How come? ” correctly.
Let’s quickly look at the reality surrounding the main characters.
1) There were prophetic economists ringing the alarm bell but those in power didn’t want to listen. So here is the point. Ultimately it isn’t about what economists were saying. The alarmist message was loud and clear but those in power weren’t convinced that this message was correct. Furthermore for various and sundry reasons, it wasn’t 100% clear that the doomsayers were correct but hindsight is always 20-20.
2) I have no idea why groups 2 and 3 above even agreed to be interviewed. Charles Ferguson’s previous movie No End in Sight is a critical documentary of the Bush administration’s handling of Iraq after the war. In many ways Ferguson is a more sophisticated version of Michael Moore and each specialize in exposes. One needs to think carefully about agreeing to be interviewed by them. I have only two explanations for why economists like Mishkin and Hubbard did agree to participate. Either they were incredibly naive about what they thought was going to happen or they were incredibly arrogant, thinking they would be able to handle any question well. ( A piece of advice if you are the later. Never think you can outwit the person who edits the film.) The folks who agreed to be interviewed were so obviously blind-sided that I am inclined to believe they were naive. I don’t think these men were smart to agree to be in this documentary but that does not necessarily make them guilty.
So now, what is with the conflict of interest angle? I think transparency is a very good thing and should be mandated but I don’t believe the crisis happened because economists didn’t reveal how much the industry paid them in consulting or directorship fees. It is incredibly silly to think that these academics do non-academic work for free, so everyone should assume they were getting paid. When they speak, the conflict of interest should come as no surprise.
3) Freer financial markets have created tremendous wealth and the negative domino effect that occurs when a problem in one market spills over into another doesn’t negate that fact. BUT we do need some containment measures when a problem occurs. Those with concentrated power tend to lobby to get rid of those measures because they are costly to implement. However, concentrated power is not necessarily illegal, especially if it is created by the government who facilitated mergers between big players in part to stabilize the financial system as cheaply as possible.
4) While Charles Ferguson asserts that the problems that lead to the financial crisis are simple to understand, I think getting the right regulations isn’t quite so simple. You need to know nitty, gritty details…details found inside the minds of investment bankers which can look like a conflict of interest if they are hired to sort things out. For example, on November 4th Mark Carney an ex-Goldman Sachs employee and Governor of The Bank of Canada became the new chairman of The Financial Stability Board and this committee makes recommendations for regulations across the G-20. The point is that if we want talented people working on this problem, it probably comes from a pretty small pool. (My advice to Mark Carney would be the same as what economist Glen Hubbard said to Charles Ferguson during his interview, “Give it your best shot.”)
d) Lastly, to the victims. Let me give a few truisms. If a deal seems too good to be true, it probably is. Unbelievable returns and opportunities are just that…unbelievable. That is why I throw out all of the mail I get for new credit cards and that is why when a person buys a house they should make sure they have the ability to pay for it. Victims need to ask themselves some long, hard questions about the part they played in the crisis.
On the other hand, those who profit from the sales of houses and financial instruments should also have those profits clawed back if the sales go bad at a later date. We need to put incentives on long-run rather than short-term profits if we want financial stability.
Let me close with a very astute observation made by Adam Smith, the granddaddy of economics, in the hope that economists everywhere consider their character as they do their work.
When we consider the character of any individual, we naturally view it under two different aspects; first, as it may affect his own happiness; and secondly, as it may affect that of other people. Taken from The Theory of Moral Sentiments (1759).
Tags: Charles Ferguson, Evie Adomait, financial crisis, Inside Job