Thursday, November 18, 2010

Two Inside Jobs

One is the great animated film about the sort-of dentist who pulls off a jaw-dropping heist while musing on “The Secret of the Sierra Madre”.

The other is the near-great documentary about the financial crisis now showing in small-capacity art houses in scattered American cities. Economists have fixated on the section near the end that lampoons Fred Mishkin, John Campbell and Glenn Hubbard, the latter somewhat too aggressively for my comfort. (Even the evildoers deserve to have their responses to attacks by interviewers not edited out.)

Overall, I think the film does a fine job explaining the profound malfeasance of the financial sector, finance’s lock on government, and government’s enabling of the whole thing. What’s missing from its purview, however, is economics—not the profession but the dimension.

This shows up in the way economists are criticized: they are denounced for their venality and policy recommendations, but not for the intellectual constructs they have promulgated that have made it almost impossible to think clearly about finance and macroeconomic risk. Just to take one example, it is remarkable that the filmmakers could devote an entire segment to the sins of economists and never mention the efficient market hypothesis. OK, maybe I am asking for the sort of treatment that would appeal to a handful of dissident economists and would be of no interest at all to the millions Ferguson and his colleagues are hoping to reach.

Nevertheless, the lack of economic perspective (which is reinforced by the list of individuals thanked in the closing credits) shows up in two particularly important ways. First, while income inequality is recognized as a cause of the rapid increase in household debt, no mention is made of current account deficits (global imbalances). This topic does not have to be presented scholastically; on the contrary, it lends itself to catchy animations, ominous music (of which there is already a lot), and expressions of outrage.

Second, the critique of the 2008 bailouts offered by the film is entirely moralistic: bad people were rescued at our expense and allowed to profit handsomely for their crimes. Yes, but there is another point of increasing importance: the decision of governments to assume the full burden of private financial losses has stretched public treasuries to the breaking point. This is already visible in Ireland and beginning to emerge in Portugal and Spain. The process of writing off bad debt is still at an early stage in the US, but it is possible we will experience similar tensions. At the least, the attempt to postpone or sidestep writedowns will prolong deleveraging and lead to many years of anemic economic performance.

On a positive note, and despite the cheesiness of the final shot of ol’ Lady Liberty, I welcome the closing message, which echoes the point I’ve tried to make as well: this disaster was the result of the political hegemony of the financial sector, and until those bums are thrown out no meaningful public action is possible.


jre said...

Very true, but what are the chances of actually throwing the bums out?

The only ones with a prayer of turning this thing around would share several essential qualities:
a) an understanding of finance,
b) a belief that what's good for financial interests is not necessarily good for America, and
c) the will and persuasive capacity to effect change.

So far, anyone satisfying (a) and (b) has had trouble getting tickets to the White House tour, let alone a shot at demonstrating (c).

Does anyone have a practical scheme for convincing Obama that he needs to stop appointing these evil clowns? If so, speak up.

JW Mason said...

First, while income inequality is recognized as a cause of the rapid increase in household debt, no mention is made of current account deficits

Why is the current account deficit relevant?

Comapre the current crisis with 1929. In the first period, you have an extremely skewed distribution of wealth, lax regulation enabled by the dominant school of economics, an asset bubble, and a current account *surplus*. In the second period, you have an extremely skewed distribution of wealth, lax regulation enabled by the dominant school of economics, an asset bubble, and a current account *deficit*. Isn't it reasonable to suppose that the factors that were similar in the two periods might well have been responsible for the similar financial crises and real-economy depressions, and that the factor that was exactly the opposite in the two periods (the current account) probably was not?

Put another way, how do those processes in capitalism that produce financial bubbles and crises operate differently based on how they happen to fall across national borders?

BenL8 said...

"The process of writing off debt is still at an early stage in the U.S." Can you be specific? I've read Edward Wolff's March 2010 report on the changes of wealth distribution 1983 to 2007, including a small section on the effects of the "crisis" from 2007 to 2009. Wolff concludes that 17% of the mean average net worth was lost, a drop from $64 trillion down to $53 trillion, and 36% of the median household net worth was lost (see Levy Economics Institute) s drop from $102,000 to $65,400. Significant as that is, why are the wealthiest so wealthy? That was not dealt with in the movie, nor have I found a convincing argument about it anywhere, but I'm not a pro. We all have our ideas, but there must be a quantitative analysis of the causes (taxes, unions, laws). Recently on a list of median household incomes was shown for 8 nations, and Italy had the highest, about $115,000. Why so high. How high is the mean average in Italy? The report originated from a Swiss bank. I think the left has to promote income and wealth distribution targets, and methods of achieving the targets. It was a good movie, my friend who does not follow the story enjoyed and understood a lot. I was amazed at the incompetence of so many in high places. That was enjoyable.

Don Levit said...

Thanks for providing that web site.
I think income inequality is very important, particularly if 70% of our GDP comes from consumers.
Without a vibrant middle class, we will start to look like a third world republic.
I think it's already started, we just don't realize it yet.
Don Levit

hapa said...

macteague, gold, dentistry, and a movie called 'greed' all refer to this:

Peter Dorman said...

Hapa -- you're right. I never connected these dots: Greed and Treasure of the Sierra Madre. So the film in the animation is a mashup of these two, plus a lot more. (Orson Welles? Jack Nicholson?) Thanks for this background. It is clear (though I missed it) that MacTeague in the animation is referring to "The Greed of the Sierra Madre". All the pieces were there....