The Documentary Film "Inside Job"
The documentary film Inside Job examines the issues surrounding one of the most catastrophic financial crises that the United States has ever faced. Charles H. Ferguson, the director, analyzed the financial services industry in 2008 and attributed the impending catastrophe to systematic malfeasance. The video is divided into five sections: 'How we got here,' 'The Bubble (2001-2007),' 'The Crisis,' 'Accountability,' and 'Where we are now,' which examine how America went from a vibrant financial market to a catastrophic slump. The film was released in 2010 to critical praise around the country. Critics praised it for its ability to explain even the most complex materials to all viewers, as well as its high pace and representation of well research material. The film was awarded the 2010 Academy Award for Best Picture. Watching the film answers several questions on the cause of the crisis, the events, and factors that contributed to it as well as the pitfalls to avoid to prevent the occurrence of a similar incident.
The Role of Iceland in the Crisis
Although the Inside Job is based on the U.S economic crisis, it begins in Iceland, a country that embodied the characteristics of the U.S before the 2008 economic depression. Much like the United Sates, Iceland was a developed nation with a brilliant healthcare and education system, entire infrastructure, efficient food production methods and high levels of security (Ferguson). However, although the nation once had a GNP of 13 billion dollars, the establishment of a broad deregulation policy and the privatization of three of the largest banks in Iceland led to the disastrous consequence in the form of a 100 billion dollar loss. The government figured that the money could be recovered by stimulating other industries within the country, such as mining. Unfortunately, the widespread industrial activity ruined the beautiful green landscapes in the nation. The director draws attention to the nation as it is one of the regions that have attempted financial deregulation with dire financial consequences, much like the U.S.A did in 2008, therefore triggering a global recession.
The Events Leading to the Financial Crisis
The events that led up to the U.S financial crisis were initiated by the deregulation of the domestic financial firms between the 1980s and the 1990s which led to the development of giant financial firms in the market. The advent of the internet prompted these firms to invest in failing internet stock which led to a five trillion dollar loss that led to an instability further compounded by the growth in popularity of derivatives (Ferguson). The domination of the financial sector by a handful of private financial firms led to the use of collateralized debt obligations and false AAA ratings. Provision of loans became predatory. When the obligations collapsed, the dominant firms were in debt as they could not sell the real estate that they possessed. Most of them eventually closed down when they ran out of cash as the government was unable to provide the 700 billion dollar loan required to save the banks (Ferguson). The size of the loan required crippled the global financial system, stock prices drastically reduced, unemployment increased as thousands of workers were laid off, home foreclosure became a norm, and many other companies became bankrupt as a result.
The Bubble in the U.S Financial Market
There were signs that the financial markets and the real estate sector in the United States were indentured in a bubble (Ferguson). First, there was a boom in the purchase of houses that saw the dominant private banking firms give out more loans and acquire almost no assets that could be claimed as bank property. Participants in the financial market used bank loans to purchase and invest in credit default swap policies and collateralized debt obligations owned by the banks (Ferguson). The bubble ultimately burst when the AAA rated instruments suddenly increased, and other minor financial institutions received ratings that allowed them to offer collateralized debt obligations and credit default swap policies that created further debt in the financial market. Suddenly the banks had almost no cash, and they possessed real estate that was too expensive to offload to citizens who could no longer be afforded the mortgages to which they were previously privy.
The Core Cause of the Financial Crisis
Financial deregulation was the core course of the 2008 financial crisis. The extended deregulation period between the 1980s and 1990s allowed large private financial firms to come into existence and dupe investors into investing five trillion dollars in worthless internet stock (Ferguson). The lack of regulations also saw the establishment and use of derivatives in the market which compounded the inherent instability. Loans and debts were sold to investors who in turn gave access to ridiculously high loans that would be almost impossible to pay. An analysis of the above course of events reveal the initial giant firms, the Commodity Futures Modernization Act of 2000, investment banks, financial conglomerates, rating agencies, insurance firms and the appropriate finance official as the villains of the story (Ferguson). The heroes of the story were the government as they attempted to established control policies for the financial activities. The villains triumphed due to the lack of adequate control measures in the financial market.
The Role of Different Financial Aspects
Different aspects of the 2008 financial sector played a different role in creating the 2008 crisis. The derivatives allowed the finance institutions to base the value of loans on interest rates to gain more ground in the financial market through the acquisition of assets. Variations such as the credit default swap and the collateralized debt obligation saw the banks lend a lot of money that the debtors were incapable of paying (Ferguson). Subprime mortgages were one of the loans that were eventually perceived as collateralized debt obligations, therefore compounding the debt for the financial firms. Investment banks initiated the use of derivatives, and later the sale of low value collateralized debt obligations at high prices to investors. Collateralized debt obligations are a form of derivatives that weakened the financial market in 2008 by ensuring investors of the repayment of loans via assets that the firms did not possess (Ferguson). Leverage and mortgage-backed securities led to significance losses due to the lowered rate of return attached to the loans.
Bad Behavior and Lack of Accountability
Throughout the film, a lot of bad behavior by the members who constitute the financial firms is documented. I think that such behaviors take place due to the excessive amount of money that the employees and officials make on a day to day basis. The money they earn allows them to engage in any of the vices they choose to participate in without the fear of reprimand. The bad behavior also remains prevalent as it seems to be rewarded with obscene amounts of money. Characteristics such as greed, dishonesty and lack of concern for others prompted investment bankers to engage in schemes that would profit them but cost the public millions. If such people were morally upright, they would not have created an environment that destabilized the entire U.S economy for their economic gain.
The Role of Economists and Financial Regulators
The academic economists and financial regulators contributed to the crisis because they identified that practices such as the deregulation of the financial institutions would lead to a disaster of epic proportions. In contrast, the economists and regulators did not study the effects of the international capital to the financial bubble that preceded the crisis. The lack of insight on the macroeconomic factors left the U.S economy to operate within a domestic bubble that later crippled the entire global economy. There were also some politics involved in the whole debacle, as actions that could have to prevent any financial crisis such as the enactment of Commodity Futures Modernization Act of 2000 failed to take root. Academic economists and financial regulators failed to illustrate the effects of such factors.
Preventing Future Financial Crises
In conclusion, to prevent such events from taking place in the future, the correct economic reforms should be put in place. As such, there will be little opportunity for financial institutions to make use of the market trends to swindle the public for their personal gain. Prosecution procedures should also be put in place for the people that create and perpetrate financial strategies to rip off the public. As it is, none of the officials that participated in the scandal were held accountable. Millions were lost while their coffers remain full. What is to stop likeminded people from masterminding a similar event? The most important lesson to be learned from the crisis is the regulation of the private sector. That way, their activities can be monitored, and any action that will jeopardize the economy will be identified and prevented.
Works Cited
Inside Job. Directed by Charles H. Ferguson, Perf. Matt Damon. 2010. Sony Pictures Classics, 2010.
