Review: The credit crunch as an inside job

Inside Job, film by Charles Ferguson (director), narrated by Matt Damon. Available for pre-order as DVD.

Enough oceans of ink have been spilled in attempts to explain the credit crunch (or condemn whoever the author thinks is responsible) to make me slightly sceptical of the need for a documentary film covering the same ground. Add the difficulty of explaining economics in the medium of film and I was a bit wary when I sat down in a virtually empty cinema to watch Inside Job. But on the whole the film acquitted itself very well. If you’re still not quite sure how we got into this economic mess you could do much worse than to spend an hour and a half watching this film.

The beginning sets the tone with a visit to Iceland. The way in which Icelandic banks enormously expanded their borrowing and lending (with government and regulators acting as cheerleaders rather than Cassandras) until they messed up and bankrupted the country is an effective illustration of the financial madness of the boom years. The introduction ends with an Icelandic academic lamenting that the best people from the financial regulator would switch to jobs at the banks they had regulated, a fairly obvious conflict of interest. “But it must be the same everywhere. You have the same problem in New York, right?”

Right indeed. The focus of the film is on conflicts of interest and how these allowed an enormous housing bubble and an opaque market in derivatives to expand without anyone doing anything about it. The revolving door between Washington and Wall Street is naturally a major focus, but an angle much less covered in discussion of the crisis is conflicts of interest in academia. Many leading academic economists earn most of their money from consulting work for and seats on the boards of financial firms, which might well explain why few of them rang alarm bells during the boom. As the film points out, if a medical researcher earned 80% of his income from pharmaceutical companies the independence of his research would be questioned, but universities don’t seem to think conflicts of interest are a problem in economics.

In this part of the film the interviewing is especially strong, though it is very good throughout. The interview of Glenn Hubbard is particularly devastating and revealing. Among other things he co-authored a paper called “Financial Stability in Iceland” in 2006, painting a sunny picture of the country’s regulatory and financial institutions. He did not disclose that he was paid $134,858 by the Icelandic Chamber of Commerce for writing it. Interestingly the paper appears on his CV under the title “Financial Instability [sic] in Iceland”. (Mr Hubbard says that was a typo.)

The film does however have two weaknesses. The first is that (apart from the opening scene in Iceland) it is entirely focused on what happened in America. That is perfectly understandable, but if you want a more globally balanced perspective on the causes of the crisis it would be a good idea to read a book like Vince Cable’s The Storm as well.

The second weakness is the depiction of the credit crunch as an “inside job”: basically caused by the financial industry running amok, and with the state suborned by lobbying, campaign contributions and ex-bankers in government. A more rounded view of the causes should recognise that there are deeper problems in the background: a surge of savings from developing countries flooding into US capital markets because their central banks wanted to peg their currencies against the dollar, and a corresponding lack of opportunities for productive investments (as opposed to bidding up the prices of assets like housing) in Western economies.

And the state was not just a victim but in many ways an accessory to the crime. Fannie Mae and Freddie Mac (misleadingly described simply as “two large mortgage companies” in the film) were state-guaranteed instruments of US government policy. They helped to inflate the housing bubble by guaranteeing ever dodgier mortgages, a policy pushed by both the Clinton and Bush administrations. On both of these subjects Johan Norberg’s Financial Fiasco is required reading.

Despite these blemishes, Inside Job is still well worth watching. The story is told in a well-structured way without dumbing down, but equally without getting too technical. The interviews are often revealing, and include many of the key people involved in the crisis. And the directing is excellent, with an eye for the occasional comic moments that lighten the mood and make this film enjoyable as well as educational and polemical.

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