Tomorrow night over a hundred million Americans and millions more around the world will watch the annual Oscars ceremony. Of all categories ‘Best Picture’ is considered the most prestigious, and it is therefore always announced last. This year there are eight nominees, an unusually high number. Favorite is ‘The Revenant’ with Leonardo DiCaprio, who is also expected to win the Oscar for ‘Best Actor,’ although he’ll have strong competition from Matt Damon in ‘The Martian.’ I believe that there should also be a category ‘Most Important Picture,’ and that would narrow the field down to two of the nominated movies, ‘Spotlight’ and ‘The Big Short.’ The former shows the role of the Boston Globe in uncovering the sexual abuse scandal in the Roman Catholic church, and the latter shows how one individual and two separate groups of investors anticipated the collapse of the home mortgage market in the US in 2008 and ‘shorted’ it, which essentially comes down to placing bets that it would fold. As relevant and well made as ‘Spotlight’ is, my choice for most important picture would be ‘The Big Short.’
The financial market collapsed because big banks started selling ‘Mortgage Backed Securities,’ often bundled into ‘Collateralized Debt Obligations.’ The problem with these ‘products’ was that an increasing number of the mortgages they included had been given to people who could not possibly afford them and would sooner or later have to default, usually when the interest rate turned from fixed to variable, making the mortgages and therefore the securities they backed worthless. Once those defaults reached a critical volume banks could no longer meet their obligations and started to fail, until the US Government bailed most of them out. The movie illustrates convincingly how a significant part of the financial sector resembles a high stakes casino, which potentially jeopardizes the livelihood of large numbers of people. It explains the basics of what happened in the lead-up to the crisis of 2008, but of course it can only scratch the surface, because a movie is not the best vehicle to conduct a profound historic and economic analysis. It’s an excellent start though, and hopefully it will lead to more study and then action.
I believe that the problems started when US corporations eliminated their pension funds in the 1990s and turned them into 401Ks. The amount of money that flowed into the stock market as a result completely disrupted its balance of supply and demand, with the effect that stocks became disconnected from the value of the companies they represented, and trading became a gambling operation, with buying and selling at the right time more important than what is bought and sold.
That process was facilitated by the fact that during the previous twenty years the valuation of firms shifted from tangible assets, such as raw materials, real estate, finished products and cash, to intangible assets, such as innovativeness and success in alliances and foreign investments. Since the latter assets are much harder to quantify, it became unclear how much companies were worth.
The ability to make gigantic profits by placing the right bets at the right time led to the transactions that caused the crisis. Since US banks are now back to their old tricks it makes you wonder if the controls that are in place are enough, and if Bernie is preferable over Hillary.