This is the official trailer for the 2010 documentary, “Inside Job”, by Charles Ferguson. The purpose of this film was to explore the reasons behind the financial meltdown of 2008. When I first heard about this movie, I thought it was going to be cut and dry stuff, but in fact, it’s beautifully shot and well edited. It’s thrilling to watch Ferguson grill government and private sector officials, as he exposes who and what plunged our financial system into a standstill.
Many people don’t really know the causes behind the recession. I’ll do my best to explain it here:
Charles Ferguson, as well as many other economists believe that the root cause of the recession was the deregulation of banks. This began in the 1980s during Ronald Regan’s presidency. Regan was not a fan of government intervention in open credit markets. With his support, deregulation became popular among policy makers. In 1987, Regan appointed Alan Greenspan as the chairman of the US Federal Reserve. Greenspan spearheaded the liberalization of banks from government control. He helped to alleviate a number of regulations to give banks more independence. In 2000, Senator Phil Gramm of Texas wrote up a 262 page to an appropriations bill to deregulate derivatives trading and other complicated financial tools like collateral debt obligations. This was a nail in the coffin for the Glass-Steagall Act that was passed in 1933. The act put in place a number of banking regulations and created the Federal Deposit Insurance Corporation to increase investor’s confidence in the economy. This act was passed during Franklin Roosevelt’s presidency to prevent a repeat of the Great Depression.
Without government supervision, the banks were free to do almost anything they pleased. This was most evident in the housing market. In late 2001, the housing market began to pick up. As each year passed, we saw dramatic increases in home values which made homeownership very attractive. However, many people were denied normal bank loans because they had bad credit. This is where some banks became clever and introduced the subprime mortgage industry. This was basically a large group of banks that allowed financing to people regardless of their credit or inability to prove income. These companies gave away loans at high interest rates and ridiculous closing cost with payments to double after two years. Billion dollar investment banking firms such as Bear Stearns and Lehman Brothers began buying this mortgage debt because the returns were almost double the investments. These companies knew that the people borrowing from them would not be able to pay them back. They insured themselves against bad debts with credit default swaps, which is basically an insurance policy for banks. The banks now had a vested interest in selling insanely risky products, as they themselves were lavishly insured with these swaps. When people could not pay their mortgages or take out a second mortgage to refinance, the banks began foreclosing to the point where they put themselves out of business. Bankers from these companies walked away with fat pockets from their insurance policies while many ordinary people lost their homes and jobs.
Occupy Wall Street cartoon depicting bankers on Wall Street |
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