For most people who see The Big Short, what it teaches about the 2008 financial crisis will likely be the sum total of their knowledge about the event. And that is troubling. The movie is entertaining and offers a good description of securitized mortgages and similar financial instruments but oversimplifies the cause of the crisis as the greed of bankers. Worse still, it omits important facts that about the crisis that are at odds with this explanation.
The Big Short has been nominated for Best Picture. Its great commercial and critical success may portend Hollywood’s growing capacity to manipulate public opinion, because the film perfects a smoothly innovative form—the hybrid fact-fiction documentary. Except for Michael Burry, the characters are fictional but loosely based on real people. This fictionalization creates a powerful mechanism for spinning the facts to support a tendentious and politically motivated thesis.
The movie’s most important omission is the role of government in creating the crisis.
Timothy Howard’s The Mortgage Wars focuses on his unique perspective on the lead-up to the financial crisis. He is not a high-profile personality like former Treasury Secretaries Geithner or Paulson or Chairman Bair of the FDIC, as most people probably are unfamiliar with him. From his position as a former chief financial officer of Fannie Mae with decades of experience in senior management there, he certainly has much technical knowledge to share about the buildup of Fannie Mae to its status as a mega financial institution and then its spectacular crash landing in September 2008 when it was placed under…
When government financial officers, like Treasury Secretaries and Fed Chairmen, stand at the edge of the cliff of a market panic and stare down into the abyss of potential financial chaos, they always decide upon government intervention. In the first place, nobody wants to go down in the ignominy of being the ones who stood there and did nothing in the face of a financial collapse. Secondly, nobody will or should take the risk of triggering the unnecessary financial and economic destruction of a debt deflation. So they always do and should intervene. In a panic, the desire for return on…
Mel Watts, the recently confirmed director of the Federal Housing Finance Administration, last week announced new policies for Fannie Mae and Freddie Mac. He wants to continue to allow these government backed financiers to back mortgages even as large as $625,500 and to “encourage credit access.” This policy reverses the efforts by his predecessor at the FHFA to shrink the footprint of Freddie Mac and Fannie Mae by tightening credit standards and reducing the amount of mortgages they could guarantee.
As I have noted before, the Clinton Administration set the stage for the mortgage crisis by encouraging government backed mortgages with lax standards into order to engage in redistribution at the potential and, as it turned out, actual expense to taxpayers. Watts is going down the same road. Sadly, any administration is likely to succumb to the temptation so long as Fannie Mae and Freddie Mac are in existence.
Watts’ polices reflect four dangers of government involvement in the mortgage market.