5-3-16 – The Big Short

by John McClaughry

Last week I watched The Big Short, a much discussed movie about the financial crash of 2008. The central plot is this: the stock market is racing at full speed to buy not only defective mortgage backed securities, but also a wide range of bizarre derivatives having little connection to anything of value.  But two groups of investment managers – decent folks who we want to succeed –  are having increasing doubts about whether the value behind these securities is worth anything close to what they’re selling for in the market..

So the two groups short the market, which means they are paid now for securities that they must deliver later on, and if the market crashes, they turn over the securities that are then worth far less than they were paid for them up front.

And of course the market does crash, and the investors who shorted it – the good guys – make a lot of money. But they realize that this avalanche of Wall Street greed cost ordinary people their homes and livelihoods.

The movie is engaging, and the Wall Street culture is truly repulsive, but here’s what’s wrong with this story: there’s never a hint that it was the Federal government, Federal Reserve Board and Fannie Mae that deliberately enabled this calamity. The script just reinforces the Bernie Sanders Wall Street greed narrative, but that calamity would never have happened but for Bill Clinton and Alan Greenspan. The whole story is laid out in disgusting detail on Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment, Peter Wallison’s  Hidden in Plain Sight, and Peter Ferrara’s America’s Ticking Bankruptcy Bombnone of which will ever be made into a movie.

– John McClaughry is the founder and vice president of the Ethan Allen Institute

{ 2 comments… read them below or add one }

Jim Bulmer May 6, 2016 at 9:37 pm

I recall vividly Barney Frank when confronted with the possibility of requiring a 20% down payment to buy a home became very upset and said words to the effect that if that requirement prevailed, those who could not afford a home could not buy one. Further, banks were intimidated to provide mortgages to folks everyone knew could not repay the loan. John is right, Bill Clinton was up to his neck is these dealings.

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Doug Richmond, Underhill May 6, 2016 at 11:33 pm

Wasn’t there a minority, poverty mandate, to guarantee people mortgages and homes with zero down, and no regard for ability to pay. Was that Dodd Frank. no. I can’t remember what the program was called. No redlining hopeless neighborhoods, no more turning people down for unability to pay,

Of course the greed was to move this worthless paper to anyone who would take them, and lie like hell to get them sold

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