If art exists to provide us with a new perspective on society, then it should come as no surprise that a man whose career has been built thinking critically about film should be offering such reasoned insight into our present debacles. I've been up all night dealing with a Crohn's flare, and this singular blog entry by Mr. Ebert has made it worth the time.

Isn't it interesting that filmmakers seem to be supplanting television reporters as sources of meaningful investigations, and art critics offer more helpful insight than the talking heads on cable?

I can just imagine the late Senator Wellstone railing on the Senate floor about this. Would that current Minnesota Senators Klobuchar & Franken would do the same. [SIGH]

I finally watched Michael Moore's Capitalism: a Love Story, and thought that he really dropped the ball on some issues. Dismissing all Derivatives as "incomprehensible" was a cop-out on Moore's part. I'm looking forward to seeing Inside Job for a more substantial treatment of what happened.

For example, Moore described "Dead Peasant Insurance" - companies secretly taking out insurance on their employees - but failed to connect that with Credit Default Swaps (CDS), which are similar in concept. You could call them "Dead Debt Insurance": AIG could sell you a CDS against someone else's debt, e.g. Lehman Bros. debt, and do it again and again. They raked in the money until Lehman defaulted, all those CDS came due, and they didn't have the money to pay out. Bye bye AIG ... 8)

I remember watching that scary documentary "Collapse" featuring that poor guy Michael Rupert. He is skeptical about Obama administration, and it's fearful to see that he seems to be more right as the time goes by.

I saw the aftermath of the collapse in the housing market in US for myself. I fortunately had not come across the Tea Party, but I have heard about them a lot from you and others. What they want will ultimately lead them to the hopeless situation with no way out, and I wish they will get wise up by "Inside Job" or Michael Moore's "Capitalism: A Love Story". Sadly, they seems to be the counterpart of some recent scientific evidence for a certain scientific theory(discovered in Tibet, you know).

P.S.
I also fear that the same or similar thing will happen to South Korea for several reasons. How will they call "derivatives" in Korean? I checked Wikipedia, and they did explain it to me, but I'm still scratching my head about its exact meaning.

Jim Cramer...I wouldn't trust that guy to sell me a postage stamp. This movie sounds excellent and it's going right to the top of my 'must-see' list.

An interesting discussion on this article - http://news.ycombinator.com/item?id=1372082

Personally, I think you're wrong. And that the movie is nothing but manipulative.

When I first saw CASINO ROYALE a few years ago it seemed rather far-fetched to me that the villain was shown betting against the value of an airline which prototype he tried to have destroyed. Why would such a mechanism exist in Wall Street in the first place? I actually thought it had to be 100% movie fantasy.
I've read about these cases lately and I still wonder why they were ever created to begin with, to what logical economic purpose.
There has to be an answer.

I still remember being shocked when I realized what a derivative actually was. If you wanted, you could actually make a derivative which paid you if you guessed correctly which way an asset would go. If you think it will go up, you bet that way and you if it does, you get paid. If it doesn't, you lose. And you never need actually take possession of the asset; it's just a pure betting slip.

It is LITERALLY legalized gambling, except that traders would do it with vast amounts of other peoples' money and get paid proportionately vast sums of money to do it. And no one had a problem with this, even when Warren Buffett himself was running around calling them "financial weapons of mass destruction".

But let's be honest: on some level, ordinary people didn't have much problem with this behaviour until they finally saw it affect their house prices. Everyone was happy to engage in the ridiculous speculative real-estate bubble until it burst. Listening to talk radio, it seems like ordinary hard-working people don't even like the idea of legally limiting banker executive pay. We seem to be fond of our "masters of the universe" most of the time. Maybe we envy the way they achieve such stratospheric ratios of income to work. Or maybe we're so irrationally terrified of socialism that we would prefer to allow this behaviour to continue, just to tell ourselves that we're not socialist in any way (even though we are).

Ebert: It doesn't take a socialist to see that capitalism practiced in this way is evil.

So this is what is has come to. Those who are "too big to fail" get a government bailout. The rest of us work our asses off, then sink or barely swim. My grandmother lost her life savings in her last six months because she didn't have nursing home insurance.

Yet another reason to like our Senator Carl Levin.

Those who have not seen it should also look at "Capitalism: A Love Story," which, I think, is Michael Moore's best film.

The financial reform is really in danger of failing due to the lobbyism, isn't it?

I mean, think about it: speculants are only anticipating trends, and they can only exacerbate them through certain high-risk financial instruments as naked short selling. You'd think that after what happened the last years, this would be the first thing they would simply prohibit (along with derivatives above a certain level of complexity).

Yet when Chancellor Merkel opted to set an example this week and just do it and prohibit naked short sales here in Germany, everybody, even within the country, is bashing her for it instead of saying: "Hey, right. Almost forgot that. Let's do it in our countries as well, right now."

That's the tragic: everybody knows what must be done to avoid similar crises in the future (or at least make them a lot less likely), but the politicians are just too spineless and short-sighted to do it even though they know that if all the developped countries act together, the bankers can't do anything against it.

I know I was only five when Reagan took office, but from what I understand the preceding years wouldn't have been described by the words: stability, prosperity and growth. I'm not trying to hate on Carter here. I just don't think the thesis that everything was just dandy until Reagan came along is correct.

Roger, I don't disagree with a word that you've said here.

I just don't think that you've gone far enough. You have left out the government collaboration in the toxic financial mess. From requiring banks to issue those risky mortgates to disabling the mortgage risk mechanisms through a trillion dollars of Fannie Mae money buying up the mortgages and selling them to Wall st. as securities.

The government (Congress) was knee-deep in collusion with Wall St. Both parties.

And it wasn't just Fuld and the boys walking away with big bonuses after melting down the market. The Fannie Mae execs (Franklin Raines, Jaime Gorelick, etc) did too.

So, why do you think the government - either party - can achieve meaningful reform. What makes you think they are even competent to achieve meaningful reform?

And why do we let them pass a financial reform bill that does not achieve reigning in Fannie Mae and Freddie Mac?

It's outrageous all around.

Lastly,

It is amusing to hear the Tea Party describe Obama as a radical. In the area of financial reform, he is no more radical than Clinton and the two Bushes.

You are conflating two issues.

Yes, he is radical on governmental power grabs. That's why the financial reform bill gives unprecedented power for the Secretary of the Treasury to TAKE OVER any financial business that it deems too big to fail or in trouble. This is radical and troublesome. Creeping socialism.

But he is also corrupted by the Wall St. collusion and is not radical in the sense that this financial reform bill was written by corrupt Chris Dodd and will not meaningfully restrict Wall St.

Why would you let Chris Dodd write the financial reform bill for Obama?

The Tea Party's point is that Congress has been corrupted - both parties, and that they will bankrupt us. If you were an incumbent during the crash, then you are culpable. You did not see this coming. More importantly, you facilitated it. Please leave now.

That was the message of Bob Bennett's loss in Utah. Of Specters loss in Pennsylvania. Both party's incumbents, get out.

You say that the film argues that "From Roosevelt until Reagan, the American economy enjoyed 40 years of stability, prosperity and growth."

I guess the inflation and unemployment of the 70's doesn't count against prosperity and growth?

Not to say that Reganomics was the solution for those things, but if that's the foundation of the film's argument, it's a bit shaky.

In the process of constructing our society mistakes were made and reforms to fix these mistakes are forever halted by those who became powerful as a result of the flaws. The structure of modern society will inevitably collapse under the weight of its flaws and it will be replaced by a new empire, which too will one day fall and be replaced by another. We are no different to past empires, future generations will study our demise and think us stupid to overlook such obvious defects. Family values have all but disappeared in the western world, property (land) is exploited and the political and financial systems are a complete fraud.

I gotta lighten up a little. But seriously, we can all see that there are major problems but we are powerless to enact sufficient change until the flawed structure completely collapses. Maybe I'm wrong and maybe we are different to every civilization that has passed before us, but I'm not optimistic of our chances. For instance, see the video below and realize how flawed our whole financial system is and ask yourself whether there is any chance that it could be changed without the catalyst of a complete collapse.

http://www.youtube.com/watch?v=vVkFb26u9g8

I don't believe Obama, or the rest of the democratic party, is oblivious to the need for serious financial reform. Nor do I believe they lack a commitment to achieving it. The problem is, they are not in control. The greatest fallacy in America is that the government runs this country. They don't.

I think often about the film Nixon and it's notion of 'the beast'. The oft-cited military-industrial complex now has been eclipsed, or maybe reinforced, by the big banks as the ruling force in America. Breaking their grip on power will take years, if not decades, of concerted political struggle.

I believe your picture attributed to Charles Ferguson is actually Eliot Spitzer, former Governor of New York and now contributor to Slate.com and other publications.

Ebert: That photo was ID'd on the web as Ferguson. Here are his Google Image hits. He's a real look-alike for Spitzer. I might have made an error.

Can this movie be sent to Obama? Food for thought, so to speak.

A bit beside the point, but: for a man ostensibly considered aware of fashion, Fuld's face is consistently bordered to the south by the beadiest, tightest, most pedestrian Windsor knot I've laid eyes on.

This guy was in the New York office?

Another crime to add to his list.

TK-
NYC

Sir -

I think you missed the memo. The one that said the US is officially a plutocracy.

Stick to movie reviews. I hated the last Shrek that I took my daughter to.

If you really want to see the root of the financial problem take a little time to investigate Fannie and Freddie. GSE's or Govt Sponsored Entities were able to run up massive debts with the backing by Democrats accepting the risks 100% then AND shockingly the continued bailouts today. Take a look at the compensation of past Fannie and Freddie executives and then look at who were their biggest financial backers. Obama on Christmas Eve signed into law unlimited backing (bailouts) for the GSE's too. Imagine if a Republican did this?

There is nothing in the financial reform bill that solves the root of the problem as "it's too complicated" according to Senator Levin. This all ends bad and it's not just Wall St it's Washington's fault too. Both parties are responsible for different part of the mess.

And now they'll insist we must dismantle the social safety net to pay off all the ponzi debt. King John's heirs, in Wall St. palaces, finally foreclosing on Magna Carta and government of the people.

While reading this blog entry and other items about the financial crisis, my mind keeps returning to Tom Wolfe's Bonfire of the Vanities. The book is great, the movie is awful and the behind-the-scenes book on the making of the movie is the best primer on how not to make a literary adaptation.

I wish that Congress and the Obama administration would grow a pair and pass financial reform that would make a difference. As it is, I'm afraid the current legislation doesn't do enough.

What's the release schedule for Inside Job? The Smartest Guys in the Room infuriated me with its tales of the Enron guys exploiting others for personal gain. I imagine this movie will make me even more mad.

This is all so very painful to read, I wonder if that's why so many people turn a blind eye to the ruthless world of systematic fraud that Wall Street has been for so long.

Roger has it right, and I'm eager to see the film.

Perhaps what our political vocabulary needs is an expansion of the word "anti-American." Right now this term is popularly understood (sadly) as "anti-jingoism" or "anti-bumper sticker slogans" or "anti-Sarah Palin." But the term would better be understood as "any assault on the common welfare of all those who are American." These guys on Wall Street are still--even after all the suffering they've caused--regarded by many as agents of the American Dream (which is, of course, to make a big pile of money and climb on top of it and give everyone else the finger). Thing is, they're doing a lot of stuff that just plain damages the country, stuff that's bad for the common welfare. It's a casino--except the government doesn't bail out Bally's or Stardust of The MGM Grand should they go under.

When the despair over all this crap seems almost overwhelming, remember how quickly Watergate unraveled after Alexander Butterfield revealed Nixon's taping system. Films like this bring us that much closer to the point of critical mass.

You are correct in your assessment Mr. Ebert, I agree with you that Wall Street was irresponsible, out of touch and greedy. At the same time I also agree with Mr. Cramer. The current problem is too big to blame on one group of people, such as Wall Street or "shiftless homeowners."

Government loosened up regulation on Wall Street, but it also loosened up the requirements for home ownership. Banks should not have been encouraging individuals and families to enter into bad mortgages, but what about realtors who were taking these families into homes they knew were to outside of the family's budget?

It is natural to try and place the blame on one group, especially when the group can be painted sinister as easily as Wall Street can. I think the responsible thing to do is to realize that many people are culpable. Blame shifting is never a good thing and I fear too much of that is occurring in our culture today.

Hello Roger. I'm not here to talk about the film in discussion and it's theme (if you think you're a naiive outsider, how much do you think someone who's outside US actually knows?). I've just wanted to say that I have created a new blog in English, just as I promised. I posted the URL to be seen above.

I really hope you like it. I'm still trying to find the right layout, to make it more personal, you know. Someday I'll take care of the whole grade rating issue. And my writing can definitely get much better (for now though, I'm writing short, quick reviews, due to lack of time). There's much room for improvement indeed.

Cheers,
A.C.

Ebert: Well written, and a good start.Readers, have a look...

The housing boom and bust deserves a documentary all its own about how Jim Cramer and his ilk are so very wrong in their "shiftless borrower" angle. Predatory lending was only the start of a chain that drew in many borrowers who otherwise could've gotten and paid a "traditional" fixed-rate mortgage, and not be in financial straits today. But because of increasing home prices caused by increased demand caused by predatory lending, some of those people had to get mortgages for a lot more than the "actual" value of the home after all the market manipulation is adjusted for; result: they only qualified for an ARM adjustable-rate mortgage, and today are making monthly payments twice as large as they otherwise would be.

My father and grandfather are currently in that situation. Together they make just over $100,000 a year, and before the housing boom/bust cycle they'd have had no problem getting a traditional fixed-rate mortgage together on a decent house. Instead, at the height of the bubble, they could only get an ARM on a modest house that's today valued at $100,000 less than their mortgage amount. "Don't worry," they were assured, "the rates won't go up much, and if they do the house will be worth more in a few years than what you paid for it, so you'll have equity you can use to refinance or move into another place with a fixed-rate mortgage." The monthly payments are now twice what they used to be, and are going up another $400/month more soon.

These are not lazy, shiftless people. These are not poor people who should never have gotten a mortgage they couldn't afford. These are middle class folks who got screwed by needing a new house at the wrong time, when the market was being manipulated and housing prices and the cost of long-term credit were artificial.

What really cheeses me off is that the cost of the TARP bailout, to save the companies that created this mess, was far larger than the amount of all the outstanding "underwater" mortgages combined. "We need to help companies get those toxic assets off their books." Good of our government to help the poisoner and not the poisoned...

It's appealing to think that the Wall Street banks were buying up those subprime loans because they knew they were going to fail, and they were betting against them. It's easy to understand, and it clearly identifies villains and their motives. And that was certainly true in many cases. It's what the government is alleging Goldman Sachs did.

But my understanding -- based, in large part, on Michael Lewis' "The Big Short" -- is that the truth is more complicated than that. In fact, the motive behind the credit default swaps was, for many firms, the same as buying the mortgage-backed securities in the first place -- they thought they were solid. If you're sure that these securities will work, why not double your earnings by selling insurance on them as well?

In a lot of ways, the issue is not so much criminal intentions, as criminal negligence. People didn't know better, because they didn't want to know. Everyone had an overwhelming incentive to look the other way.

Try to imagine it from a Wall Street banker's point of view. I'm getting loans to people who can't otherwise afford them. Because the value of their homes will probably go up, they should be able to avoid foreclosure through refinancing. In the meantime, I'm taking the risk of foreclosure and spreading it around to make sure it doesn't hurt anybody. Everyone wins, right?

The alternative -- that housing prices won't keep going up, that most of those homes will go into foreclosure, and that the spreading of risk has put the entire financial system at risk -- was simply too unthinkable to contemplate.

wow... this is absolutely unbelievable. I just as well have very little knowledge of the investment world but clearly there is something wrong with this picture. I bet these corrupt people of the financial industry rooted for Gordon Gekko in Wallstreet and would love to see him wreck more lives for financial gain in the sequel. Bad times...

That actually sounds like a terrible film in terms of conveying accurate information.

Both the Magnetar meme (as described most memorably in a recent "This American Life" episode) and the "shitty deal" meme (as shown in the youtube clip above) are just nonsense - stories told by financial illiterates that *sound* meaningful but aren't. When bad things happen, it's human nature to want to find somebody to blame. A scapegoat. We don't want to believe that things can turn bad for reasons that are unexplainable or unexplained. We want to think there was a plan. If there was a plan, then there must be nefarious planners we can blame!

But it's better to admit we don't know than invent just-so stories like this.

In the case of the "shitty deal", the Congressman is failing to understand that *prices matter*. There are places like Walmart that sell "shitty clothing". There are used-car lots and craigslist sellers who sell "shitty cars". That is a valid specialty. Selling something that you think is "shitty" doesn't demonstrate malevolence or malfeasance. It often shows just the opposite, in fact. Suppose I buy a car for three hundred bucks or a shirt for five bucks - nobody in this deal is expecting stellar product quality. A "shitty car" could be a great deal if it's worth more to the buyer than he paid for it. When the car breaks down a year later you don't blame the seller for selling you a shitty car - you knew what it was when you bought it and the value it sold for reflected that.

Same with securities. Some buyers *prefer* to buy "shitty deals" - high risk securities at low prices - because they have found ways to reduce the risk *to them*, including bundling, diversification, or insurance strategies. Just like some buyers prefer to buy "shitty cars", perhaps because they have mechanical skills or backup transportation options for when this one fails.

But when you include the idea that there was a *market price* in the story, Magnetar's wanting "risky" bundles and Goldman selling "shitty" deals stops seeming in any way nefarious. We simply have no evidence that the price didn't reflect the value.

Similarly, the idea that banks are "betting against their customers" is neither new nor interesting. When you buy *any* security, the person who sold it to you is in effect "betting against" you. The sellers are gambling that the security will be worth less to them in the future than what you are willing to pay for it now. If they didn't believe that, they wouldn't let it go so cheaply!

In short, the story you're telling has been simplified to the point of incoherence in order to fit a certain political narrative. it survived in that form because the people telling it (a) don't know any conservatives, and (b) don't know anything about finance.

Sadly, selling a "shitty deal" is the American way, whether it's stocks or the Sham-Wow. Maybe even Transformers 2.

As has been said, we really don't produce much tangible stuff anymore. Money gets sliced diced bought and sold until someone makes off with all of it and the little people end up broke, and all the people with all the money get to own their very own congressmen.

Now that's a shitty deal.

Kristin Davis' reports do not surprise me at all... But then I'm a big Luis Bunuel fan.

It's interesting what society considers high crimes. These guys steal and play with the public's money -- money being the supposed bedrock of capitalist societies -- and people are slow to realize they've been hoodwinked out of millions of dollars and therefore countless hours of their hard work (and the criminals basically get away with it at that point anyway). And while the "Master of the Universe" are doing all this a nice guy like Woody Allen can't have one lunchtime conversation without some zealous moralists on YouTube -- http://www.youtube.com/watch?v=JvF1HspfnN8 -- saying he raped his wife's daughter and all his other "high minded" philosophy is therefore meaningless. Claims that are all wrong, wrong, wrong because he did not do that and how would you know anyway, anybody who has actually seen his films knows he's cynical about grandiose theories and his philosophies are anything but and, to top off the faulty logic, a person's behavior/ who the speaker is does not disprove their ideas. And it's this lack of critical thinking skills and misplaced mercilessness out there in the world that allows Wall Street scoundrels to do their business unmonitored in the first place, while the public is more concerned with (err... distracted by) who Tiger Woods was sleeping with because, ya know, that's so our business, he is a golfer and as George Carlin said, it's only the most intellectually important sport in the world (at least he said something in regards to why we let gold courses take up so much space) and what could be more important to our well being than hearing an apology for racy behavior from a professional athlete (err... entertainer for those with nothing better to do than watch men use long rods to knock balls into holes all day, nothing subconsciously sexual about that). But then I'm not sure everybody makes these mental connections the way I do.

And on the bright side, there are Luis Bunuel and Woody Allen's films so life is still okay, finances aside.

If a person convinces another to invest money into a worthless venture which will benefit the first party, I believe that's called a con, and that is illegal. If a company convinces a person to invest in a worthless venture -- like a mortgage that they can ill afford -- to its own benefit, it is not called a con, and is perfectly legal.
Since the Supreme Court has now essentially given personhood to corporations, should they not be held to the same standards as human persons? And consequently, should not their actions described above also be illegal?

This sounds like a very interesting movie to watch. I've been reading about foreign banks recently and its interesting how the people's perception of banking is so different between the rich world, and the developing world. Here we view banks as parasites that do not facilitate growth, while, in developing countries they are viewed as integral part that help create growth.

Strikingly, western banks talk about how they are important in creating growth, but no study has ever been done to actually prove this. While, studies of developing countries' banking system show how they are directly benefiting the people. And, yet with almost no exception, developing world banks are some of the most regulated in the world. From a free markets standpoint its an interesting paradox. And even with all that regulation the largest banks in the world will soon all be foreign.

i was the world's biggest howard stern fan. when he announced his jump to satellite radio a year before it actually happened, i knew it would be a great investment. sirius stock rose steadily in the year up to the jump. about a month before the jump, i put a grand in. a month later, and still today, that grand is worth somewhere between $30 and $70. that was my first and only stock attempt.

two years ago i had some conversations with sam about the price of silver. sam, a 92-year old WWII vet, has a box full of pure silver dollars worth much more than a dollar each. he explained how precious metals go up when the market is down and vice versa. as i heard about GM and ford getting ready to collapse, I peeked at the price of gold: $735 after dropping from over $1,000. this was during the spring and summer when gas prices nearly doubled. i put about $8,000 into gold. today it's worth about $15,000.

when ford was facing collapse, i peeked at its price: $1.15. had i not just put $7,000 in gold, i certainly would have jumped on ford because i believed that ford was too much of an american staple to ever be removed. that $7,000 would be worth about $49,000 if it had gone into ford instead of gold.

oh well, i can't complain. well, i can, but i shouldn't.

During the Jimmy Carter Administration, the “Community Redevelopment Act” was passed that required banks and lenders to extend mortgages to people who could not afford to pay them. The “Community Redevelopment Act” was expanded during the Clinton Administration, and Attorney General Janet Reno threatened to prosecute lenders who did not extend mortgages to more and more people who could not have afforded them. A corrupt bargain was offered. Lenders were told that if they made these risky loans, then Fannie Mae and Freddie Mac would buy them up. Clinton’s Director of his Office of the Management and Budget was appointed by President Clinton to be the CEO of Fannie Mae and he ended up receiving a $90 million bonus.

President George W. Bush pushed for reform of Fannie Mae and Freddie Mac. An overview bill was passed in the House of Representatives but died in the Senate when a large majority of the Democrats sustained a filibuster against it. With that vote, our fate was sealed. It was only a matter of time until Fannie Mae and Freddie Mac would die.

The Democrats regained both the US Senate and House of Representatives in 2006. Banking Committee Chairs Chris Dodd and Barney Frank pressured the George W. Bush Administration to expand the number of people who would receive mortgages. This greatly increased the coming disaster.

I have applied for a mortgage three times in my life. In 1992 and 2002 I had to supply a huge amount of documentation. But in 2007 I did not need to provide any documentation, and I asked to be qualified for much more than I had qualified for in 2002, despite having only one income to justify the mortgage, as opposed where my girlfriend’s income was considered along with mine.

The whole house of cards came tumbling down in 2008.

Many of the Wall Street Masters of the Universe played fast and loose and dealt with risky mortgages. They made huge profits because they were not concerned with the massive risks they were taking.

What should have been the penalty to those Wall Street companies who gamed the system? They should have gone out of business. Yes, the FDIC and Federal Reserve needed to step in temporarily to keep the world finance system from seizing up. However as soon as the system had not collapsed, those companies who had taken massive risks needed to face the rational consequences of their behavior. They should have been allowed to fail.

For example, I understand that Citibank was one of the high fliers who took ridiculous risks, while Wells Fargo Bank did not. At the end of the day, the shareholders in Citibank should have been wiped out and Wells Fargo should have been allowed to buy the branches and assets of Citibank.

I believe in the capitalist system, both in good time and bad. But what we had was the capitalist system during the good times and socialism during the bad times. Part of the free market system is that if you fail, you fail and the answer is bankruptcy, not subsidies. The rational consequence of companies who played fast and loose with mortgages is that they would go out of business. Period.

And what about Fannie Mae and Freddie Mac, the prime engines of the collapse of the mortgage markets? Well, the recent reform bills that passed the House and Senate don’t include Fannie Mae and Freddie Mac. In fact the Senate refused, by a near party line vote, to adopt the John McCain amendment to include Fannie Mae and Freddie Mac in any financial reform bill.

Any “reform” that does not include Fannie Mae and Freddie Mac is an illusory reform. The market will collapse again, or ever increasing subsidies will be needed to prop up the financial system.

Very well written as usual. I receive more information about the financial meltdown from this blog (and from other internet sources) than I would ever here listening to the news. And for once, a solution is articulated. Yes, it is wrong to deliberately act against investors as many seem to be doing here. Yet, there is one statement in your article that puzzles me:

"From Roosevelt until Reagan, the American economy enjoyed 40 years of stability, prosperity and growth."

I do not believe that is true: in fact, when the government attempted to have a more direct control before Reagan, the results varied from "no effect" to "disastrous." In the 1970s, there were severe many financial crises. Carter's government ran a deficit every single year. During that same time, the economy suffered enormous inflation and high unemployment. Nixon experienced many of the same things during his presidency, particularly when he called for price controls that were not effective. And this is only for the United States - many European nations suffered far more.

This is important - the article makes it appear as though Reagan's ending of financial regulations were the cause of this current meltdown and the government, through reform, can fix everything. There is certainly an argument to be made for financial reform in this day and age. Yet the government does not offer the magical cure all for the woes of the nation.

Just reading this makes me so angry I don't think my blood pressure could take the actual movie. How do the likes of Fuld sleep at night? (yeah, I know - on piles of money surrounded by beautiful women).
I'm not in America but this is a global situation and it's not just mortgages either. My bank used to call me in every few months for what they called a 'financial review' supposedly to offer me helpful advice on how best to look after my money. In reality it was a very pressurised sales pitch where they tried to push various insurance policies and loans on my. I ended up taking a quite small loan which I have just finished paying off two years later. Strangely enough, since the financial crisis I haven't had my presence requested for a single 'financial review'.

Companies ought to work for the benefit of their stockholders.

That being said, and even taking into account decades of government policy driving banks to support the "American dream of home ownership" (where do we come up with these things?) by lending to deadbeats, I can't come up with anything in support of what Wall Street was selling us. The unconscionable bastard who first decided that mortgages should be securitized should be found, soundly whipped, and then attached to some clams at low tide.

Warren Buffet warned us some time ago not to invest in anything we didn't understand. What he didn't say was that the business was going to go to some lengths to create instruments of investment we couldn't possibly understand, and sell it in blister packs at the check-out lane, if you'll allow the metaphor.

Everyone involved, including those in the government with oversight, should be led to the nearest yardarm and given their date with destiny.

I haven't commented in a while here but wow what a great article! I'm hoping the spate of losses in recent primary contests is a sign of things to come, that NO incumbent or establishment ringer, Republican or Democrat, is safe; that the public is fed-up, FED-UP, with the dog-and-pony show that Washington has become. It is high time for meaningful reform that addresses the root cause of this economic debacle, and it begins with a drastic rollback of deregulation across ALL markets. And finally, FINALLY, let us lay to rest the notion of the 40th president of this country as some kind of vaunted saint. Take a look at almost every problem the U.S is facing today and see that all roads lead to Ronald Reagan: http://www.youtube.com/watch?v=kiazwyRMGT8

Again, great article, Roger!

You know, nearly everybody missed this.

I don't mean individual aspects of the 2007-08 financial crisis and the very deep recession it produced. A number of people, mostly academic economists and officials with the Federal Reserve (Tim Geithner was one) issued prescient warnings about the fragility of a market bubble based on inflated asset values and financial instruments to complicated for most people to understand. I mean the whole package -- the Gilded Age culture of Wall Street, the international linkages of debt instruments that made Wall Street's crisis everyone's problem -- the freight train that barreled over the United States in the fall of 2008.

A book I commmend is the Reinhart/Rogoff economic history "This Time is Different," which explores common elements in financial crises since the Middle Ages. Chief among those elements is the belief that crashes, defaults and other financial disasters happen to other people, in other places. In the here and now, man tends to believe he's gotten the game figured out or that the game has changed in some fundamental way -- that this time, in other words, is different.

It isn't, a lesson we're now getting beaten into our heads, but that isn't evident while things are going well. Listen to the statements of elected officials, from the President on down. They're not complaining that their advice on financial regulation or market practices was ignored, or acknowledging that anything they did contributed to the disaster. They're just blind-sided, scarcely knowing which way is up. Financial markets regulation was for years regarded, in the political world, as a boring subject of little interest to voters. After inflation was crushed during Reagan's first term, political interest in the whole subject -- specifically, in the things that could go wrong -- pretty much evaporated.

Most men and women now in elective office in Washington can barely even remember the savings and loan bubble, but the phenomenon was alive and well even then. I well remember how then-Sen. William Proxmire, senior Democrat on the Banking Committee and one of the sharpest minds in Washington, was caught completely flatfooted when bad S&L loans started sinking S&Ls. He got plenty of warning, was immune to lobbyists' influence, and was certainly smart enough to have figured out what was going on. But the economy at the time was otherwise doing pretty well, and he just didn't see it coming. Almost 20 years later, neither did we.

It's easy to be judgmental in the aftermath of the 2008 financial crisis, and in the making of public policy I believe judgmentalism is often a salutary thing. We'd be making a mistake, though, if we thought of the Great Bubble's collapse only in terms of what They did to Us. We loved our rising mutual fund portfolios and thought they depended on what Wall Street did. We wanted all Americans, or as many as possible, to own homes. We weren't that concerned about what could go wrong, as long as it didn't.

A weakness for self-congratulation is one of our national infirmities as Americans. When things go badly wrong, we leap easily to the conclusion that, since we are self-evidently righteous and upstanding, it had to be someone else's fault. Since this is a movie critic's blog, I suppose I should throw in a mention of the irony that a film about Wall Street excesses should be narrated by an actor who made uncounted millions on such valueless material as the Bourne films. My main point here, though, is simply that an economic collapse as monumental as what we've just experienced doesn't happen just because some men were able to game the financial system to get themselves more money. They could do it, because we let them.

I voted for Obama, but I'm afraid even having the first (half) black president, such a paradigm shifting moment in American history, is something that's like tossing a feather against an iron clad, when it comes to a politician's efforts to defend the interests of the majority of their constituents over the gluttonous desires of money-men.

That, or we (myself included) are not screaming bloody murder enough at our politicians AND the money-men.

One minor bit of correction to your blog post, Mr. Ebert.

While the accepted narrative sold to us in the media and by politicians is that subprime loans were mostly going to people who couldn't afford them and thus defaulted etc -- a narrative designed to give the appearance that homeowners were equally to blame for taking out loans they couldn't afford -- the facts are quite different.

Only about 10% of all subprime loans from 1998 through 2005 were actually to first-time home buyers. And more than half of all subprime loans were actually refinancing of EXISTING mortgages. A large portion of people with subprime loans actually qualified for far better loans.

The key was that brokers and lenders were doing a very hard sell to push people to take the riskier loans, through deception and outright lies about the rates and how much would be owed etc. Those subprimes had adjustable rates that suddenly leap to far higher levels (sometimes doubling or tripling) after low initial rates that were used to convince people to take the more dangerous subprime mortgages.

When the rates jumped to such extremes, people were stuck with mortgage payments they didn't expect and couldn't afford. "Didn't expect" is important, because the deception used by brokers and banks to push these subprimes literally involved lying and covering up how much the rates would rise in the future. And from 2004 on, more than 90% of the subprime mortgages had these massive doubling or tripling rate jumps.

So as far as the homeowners and buyers could tell in the vast majority of cases, they were taking out mortgages they could afford, not being risky or buying homes that were out of their income range as is claimed by the lie the media and politicians are peddling to us.

And it's worth noting that one of the key claims to this Big Lie is the attempt to claim banks were forced to give these mortgages to people who couldn't afford them, because of the 1977 Community Reinvestment Act. This claim goes on to say that Congress -- and specifically, the Democrats -- could've prevented the collapse if they'd not pushed to extend the CRA during Clinton's tenure.

The problem with this claim is that it's a total fraud. There's not an ounce of truth to it, since for one glaring example the CRA is only applicable to depository institutions -- that's right, the mortgage companies responsible for the majority of all subprime mortgages are not covered by the CRA.

It was precisely the fact of deregulation of the nonbank mortgage industry and the lack of regulation of derivatives and subprimes that created the crisis, NOT the CRA and homeownership among minorities and less-well-off people.

FYI, subprime mortgages were not even a main factor in expanding homeownership, since as already noted most subprimes were refinancing of existing mortgages for homes the people already owned -- the CRA, by contrast, with it's regulations and small percentage of subprimes (most of which didn't include massive rates either), was a key factor in expanding homeownership, and according to a Harvard study the CRA is responsible for creating about $1 trillion in bank loans. GOOD ones, remember.

By comparison to the overall housing crisis, here's a rather important but little-reported fact: the foreclosure rate on homes of people from the ACORN homeowner program was -- are you ready for this? -- 0.32%. That's ZERO-point-three-two percent. As in less than one-third of one percent. ACORN's program counsel potential buyers on finding legitimate banking institutions -- most always through the CRA -- and taking out clear, solid mortgages without leaping rates and that are prices the buyer can afford. Which is why they have perhaps the lowest foreclosure rate of any other group of buyers in the nation.

But none of this is common knowledge, in part because the media has colluded with loan institutions and politicians to spin an alternate version of history in which irresponsible poor people took out big expensive loans they couldn't afford, because the banks were forced to make the loans due to liberal Democrats pushing the CRA down everyone's throats. It's a lie, a false narrative designed to disguise the true extent of criminal, immoral behavior by those responsible for the crisis.

And make no mistake, this crisis is only in a holding pattern right now. Quite soon, it's going to move into a new phase, as some of the stop-gape measures expire and new danger areas collapse. Meanwhile, most people remain unaware that the very risky investment practices that caused the crisis are once again being used -- new derivatives, betting against them, and a whole new round of risk and made-to-fail bundling that is setting the stage for a far worse scenario that is becoming inevitable. There's just too much money to be made by a few people with all of the control in the situation, so nobody is doing anything to stop it or to prepare for the worst that's coming. But rest assured, it's coming.

Ebert: That's what worries me. The answer is to outlaw banks trading in their own accounts. How can they work harder for us than for themselves?

If Bill Hicks was alive,this would make his head explode.

As you note, Roger, the problem was that so many financial institutions not only didn't put their money where their mouths were, rather they put our money where their greed was.

Think about it: Richard Fuld received almost a half a billion dollars for driving a financial Titanic into an iceberg; an "accident" where the captain not only did not go down with his ship, but one where only the poor passengers lost their (financial) lives.

It brings to mind the question Special Counsel for the Army Joseph N. Welch directed at Sen. Joseph McCarthy during the Army-McCarthy hearings 56 years ago next week: "Have you no sense of decency sir, at long last? Have you left no sense of decency?"

In the case of Mr. Fuld and others of his ilk, the answer is obviously "None at all, sir."

While the financial reform/regulation recently passed by the Senate (which will have to be reconciled with the House version) is by no means as strong as I would have wished, it does take a few essential steps forward in the direction needed. If we force the issue we can demand even better, and given the morals (or lack thereof) exhibited by so many in the financial sector the past few decades, it seems we must.

Trusting to the good will and fine intentions of robber barons has proven us false. With proper regulation and oversight, perhaps we will once again be able to trust Wall Street.

To paraphrase Shakespeare:

"Some are born decent, some achieve decency, and others have decency forced upon them."

A little background music: Tom Waits' "God's Away on Business": http://www.youtube.com/watch?v=oxLAT2U1bCc

"Who are the ones that we kept in charge?
Killers, thieves and lawyers."

This American Life has an excellent series of episodes about this:

The Giant Pool of Money (5/9/2008): http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

Another Frightening Show About the Economy (10/3/2008): http://www.thisamericanlife.org/radio-archives/episode/365/Another-Frightening-Show-About-the-Economy

Bad Bank (2/27/2009): http://www.thisamericanlife.org/radio-archives/episode/375/bad-bank

The Watchmen (6/5/2009): http://www.thisamericanlife.org/radio-archives/episode/382/The-Watchmen

Return To The Giant Pool of Money (9/25/2009): http://www.thisamericanlife.org/radio-archives/episode/390/Return-To-The-Giant-Pool-of-Money

Inside Job (4/9/2010): http://www.thisamericanlife.org/radio-archives/episode/405/inside-job

(All but the last two of those have transcripts available as well.)

Investing in what you know and like IS outsmarting the market, since most seem to invest based on past results.

If everyone followed Siskel's advice we would not have had a financial crisis, because who the hell would invest in mortgage securities and credit default swaps then?

Did you see the emails of the Goldman Sachs executive where he called his investments "a product of pure intellectual masturbation, the type of thing which you invent telling yourself: ‘Well, what if we created a “thing,” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?" (Quoted from a Maureen Dowd column "Olive Oil and Snake Oil")

Ebert: I recommend that quote to a few conservatives here who place such trust in the working of the market.

Who'd have thought Mel Brooks was a prophet? This documentary sounds like "The Producers" minus "Springtime For Hitler". And of course it's surely not nearly as funny unless your taste runs to extreme gallows humor.

Have any of you seen both Zeitgeist´s documentaries? You can whatch them for free on the web. What it´s said there (especially in Addendum´s one) about Making Money Supply and the way the FED rules the US economy it´s true.

So you can easily guess why Mr Obama can´t do anything to handle how Wall Street works.

Good luck USA, only God could save us (The World)!!

I have no new insight to offer, but after the last cycle I owe you one of these:

Right on.

"It was directed by Charles Ferguson (below), whose academic, business and government backgrounds make him unusually well-qualified for this subject."

Sorry, that's a picture of Eliot Spitzer. Funny though how he's pictured on top of Kristen Davis.

Ebert: Now, now.

You're right. The same mistake has been made on several other sites. I figured out how that happened. The IMDb entry for "Inside Job" has only one still photo linked on it, and it's that one. Spitzer and Ferguson look very much alike. When a still photo conglomerator like OutNow! has one photo, it's routinely of the director. Do they provide csaptions? Nooo....

As a staunch capitalist, I hold no disagreement with the points you have made. Big companies made terrible mistakes. Indeed.

However, instead of stopping there, two other points must be addressed to give this situation context.

The market says that if a company does something drastically stupid, it will go bankrupt. Indeed, these financial institutions that engaged in these unscrupulous tactics, were banished from the marketplace. At least, they would have been, had the government not intervened to rescue them.

You see, the market doesn't stop businesses from making colossal mistakes, but it certainly punishes those that do.

Beyond that, it cannot be stressed enough how much Fannie Mae and Freddie Mac are the foundational problems to this whole ordeal. The complete lack of mention of them in this post is disheartening.

Fannie Mae and Freddie Mac, through over a decade of increasingly lax guidelines, completely dominated the secondary mortgage market. It's only because of their quasi-governmental status that banks made these terribly risky home loans. It's only because they were able to make these terribly risky loans that insurance companies got in the business of securitizing them. And on and on.

Only a government backed institution like Fannie Mae and Freddie Mac could ever have taken on such monumentally toxic loans. If they did not exist in the marketplace, home mortgages never would have gotten so out of sync with the market.

Without mentioning ways of dissolving Fannie Mae and Freddie Mac, the real lesson from this problem will not be learned: Get the government out of the market.

"From requiring banks to issue those risky mortgates"

Were the banks required to turn those mortgages into a speculation market?

Seriously, if I were in charge of a company and we had for whatever reason been forced to make loans that we could see were unlikely to be repaid in full, it seems to me the logical response would be "Okay, let's write these off, call it a loss, try to make it up with these other good investments." Not "We're putting it all on 23! VEGAS BABY! MAMA NEEDS A NEW PAIR OF SHOES!"

But that's just me.

Not exactly a thought-filled, probing remark, but that prostitute's pic looks kind of ... what's the word... embalmed. Ya know?

Ever read Woody Guthrie's BOUND FOR GLORY? When he went to visit his rich aunt in California? And her fancy place felt just like a mausoleum? Have encountered that with well-to-do types often. Don't touch ANYTHING.

I can understand why Thurston’s comments were rejected. Yet, it was, at least to me, a legitimate satirical statement of the propaganda tactics used by the conservatives to divert attention from their incredible failures and lack of any legitimate effort to contribute to the common good. As mentioned before, their entire national energy strategy of “Drill, baby, drill,” has been found to blow, as does their unwillingness to reign in the corrupting of our regulatory system.

Is there any reason why someone would not want guvment regulation? Yes, of course. One would not want it if one was interested in cooking the books, making one’s business pracitices and dealings as opaque as possible, while deceiving investors and feathering one’s own nest—and rather nicely from those photographs.

Incredibly, this has not caused any on the Right to flinch. They still insist that their policies are all about free enterprise. Yes; free to lie, cheat, and steal. Moreover, many in the financial sector are flat out guilty of treason, whether anyone wants to acknowledge that or not.

You're don't even have the half of it, Roger. This whole idea that the "free market" created this is just wrong. We don't have a free market. We have State Capitalism. Woodrow Wilson's bringing in the Federal Reserve, which is a private bank that prints our currency against the wishes of the original constitution and lends it back to us with interest, that is the real head of the snake. It is the central planning of the fed that floods the market with cheap credit that creates the bubbles. It is the fed setting artificially low interest rates against the wishes of the market that creates the sub-Prime fiasco. It is the fed as lender of last resort that will bail out the "too big to fails" that allows firms to to take outlandish risks because like Chrysler and the Savings and Loans crisis before this latest meltdown, they will never be punished for stupidity and greed, just given a handout at taxpayer expense. Now we are bailing out Greece. This whole heathcare scheme is "financed" with money we don't have. Social security is a bigger ponzi scheme than Madoff. The Fed is the engine of our crushing debt. It was first FDR, then Nixon who took us off the Gold Standard that made our money worthless over time and is about to bring about the great Weimar style hyperinflation in the next couple years. The only reason we can have the Welfare-Warfare state that we do is because we print reams of increasingly worthless dollars backed by nothing to maintain the illusion, but like all fiat currencies, it will collapse, first in Europe, then here.

We do not have a free market in this country. A free market would have allowed these crooks to fail and go broke, not give them bailouts that they turn around and give to themselves raises with. A free market won't keep interest rates artificially low or at near zero and create this mess. What we have is a State-Corporatist marriage. Bush and Obama both feed at the alter of Goldman Sachs, and big government and big business feed off each other at the expense of the family farmer, the entrepreneur, the small business owner and the middle class taxpayer.

The financial reform bill is a joke. If you want real reform audit the Fed. Bernie Sanders sold out Ron Paul and caved to the lobbyists from the Federal reserve, a secret government unto itself accountable to nobody. This bill puts gives the fed even more power.

I'm 20, and do you think that 10+ trillion dollars in debt that the Obama administration has saddled my generation with should also be criticized with the level of emotion that is directed toward 'evil' Wall Street?

Or are you also in the school of thought that believes that policies, such as the recent healthcare 'reform' will lower the deficit?

And do you honestly consider the US economy during the late 70s to be 'stable and prosperous?'

Ebert: That money has been spent in an effort to rescue the economy. Heathcare Reform will save money.

Our politics rarely agree (which doesn't stop me from reading your blogs, obviously -- I still respect your opinions). However, on this topic, we are in lock step.

I know you hardly need my stamp of approval, but I wanted to say for what it's worth that I appreciate you using your bully pulpit to focus attention on this issue. What the supposed Masters of the Universe are allowed by our political leaders to do is outrageous and must not be allowed to continue. The current legislation does not go far enough, and I'm not getting a "warm fuzzy" that Congress will do what needs to be done: Wall Street is pouring too much money into their lobbying efforts, a significant portion of which is no doubt lining the pockets of more than a few Congressional representatives to ensure Wall Street is continued to be allowed to play Wall Street's games using Wall Street's rules.

The core of the effort to protect Wall Street is made up of Republicans, but it isn't just Republicans. I can only hope the American voters sort this all out in November. On that score I don't have a "warm fuzzy," either.

It seems to me that a free market only works if consumers are roughly as educated as the suppliers, and if the rules of the game are transparent and understandable by all. In the case of derivatives, we have neither. Scratch "warm fuzzy" #3.

What do you think of the chances of "Inside Job" getting wide circulation? Is it even a threat to the MotU? If it is, how hard would it be for Big Money to stop or seriously limit its distribution? Is Hollywood immune to the influence of the Wall Street fat cats? I've pretty much given up on "warm fuzzy" feelings by now.

Bottom line is that I'm not hopeful that Americans will wake up to this and force their elected representatives to follow through with tough regulations to stop this nonsense. But just maybe if opinion leaders like yourself keep calling attention to it, it'll help. Thank you!

Ebert "Inside Job" will be distributed by Sony Picture Classics, which is a good omen that it will receive national distribution and promotion.

Why aren't you recommending the Frontline documentaries? They are the best out there on this topic and available to watch instantly right now on Netflix:

1) Frontline: The Warning
2) Frontline: Breaking the Bank
3) Frontline: Inside the meltdown

Documentaries closely related

1) Frontline: The Card Game
2) Frontline: 10 Trillion and Counting

I'm sure I'll watch this doc when it comes out, but does it contain anything new? (Not being sarcastic. I really want to know if its something I haven't seen)

In response to matt beasley comment above "get government out of the market".

With all do respect, you don't know what you're talking about.

Even Alan Greenspan admitted at a congressional hearing, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” and “This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year [2008].”

No. Fannie Mae and Freddie Mac with "quasi-governmental status" did not make them some misinterpreted beacon of "safe investment". This bad mortgage hedging was the industry wide practice of "Got my bonus/commission! Its the next guy's problem". Why? Because NO ONE WAS LOOKING!

And don't give me any "well this Bush admin duputy director, etc. guy told us on CSPAN when ..." BS. This needed to be a national issues at least as big as the Iraq conflict.

We tried deregulation, starting with Regan, through Clinton, and on into Bush the younger. It didn't work. A LOT of people got hurt. Not just a "few unlucky bastards".. TENS OF MILLIONS of people ..

How can you see this and say "Yup market takes care of itself just fine. In fact we should pay even less attention" ?

In response to Mark Hughes

You are leaving out one very important fact. It doesn't matter that the vast majority of loans were GOOD loans. Because you don't need that many BAD loans to fail before it completely destroys your profit margin.

Think about this. You have 10 good loans of $100 each lent out. You are going to make lets say $5 profit on each. That's $50 dollars. If you make 2 BAD loans at $100, and one is a dud.. ($55 profit) - ($100 busted loan) = Deep s**t... Just imagine that on a much larger scale. Oversimplified? Yes. But if you look into it, that's what happened.

Once deregulation went into full swing (Clinton era) key regulations had been altered or lifted that allowed banks to basically issue more BAD loans. They knew how dangerous it was but didn't care. It's been sliced and diced in with GOOD loans to make it look like a legit asset to the buyer (the next bank up).

And another thing, nobody is talking about those gas prices. Doesn't anyone remember the $4.50 + per gallon we paid for gas in 2006 and 2007? That right there is what started the chain reaction of meltdown. Everything (transport of food, goods, etc.) went up in price because of the gas spike. Suddenly the borderline income (so called BAD loan people) family are unable to meet their monthly budget. Of coarse a year later you have the Oct 2008 crash. Its no coincidence.

I searched the internet today and found Korean(and Chinese)term for Derivatives. And I was surprised to learn that I've already encountered its mechanism from the movie. As Gerardo pointed out, The movie was "Casino Royale".

"Healthcare Reform will save money." Roger, c'mon. There is NO WAY to state that as a fact. Whenever government gets involved, cost estimates invariably are on the low side. The CBO had to add $115 billion to the tab recently just for implementation costs.

We've got an administration mortgaging the country's future to the hilt (and beyond), but no concern on your part there. You don't believe in God, but you sure as hell worship Obama.

You are already a Master of the Universe Mr. Ebert. I just thought it needed to be said though i know you meant a 'financial' Master of the Universe.If, in today's world, you can be a high profile public figure who can go home each night to the same woman, not have nagging addictions to prostitutes and cocaine and at the same time manage not to rip people off, then count yourself a Master of the Universe.

Unless this movie mentions the Federal Reserve and the role it played in both creating a false bubble and enriching its corporate friends, it lacks the biggest piece of the puzzle.

BTW, Roger, the administration you claim is trying to "rescue" our economy is run by the same Banksters who controlled Bush/Cheney.
"An Updated List of Goldman Sachs Ties to the Obama Admnistration":

http://seminal.firedoglake.com/diary/46267

One final thing: can you think of any way, Roger, of reining in the wall street pigs without empowering the very same regulators and officials who have been in their pockets all these years? Seems counter-productive to me. Why not solve these things at the popular, local level?

There is a very simple reason why many of the readers of this blog are wrong to argue on the side of Cramer's argument that the housing bubble is at all to be blamed on the "shiftless homeowners." Here's the reason:

There have ALWAYS been some shiftless homeowners and/or some people who would become shiftless homeowners if you gave them the chance to become homeowners. A problem does not arise because of the sudden, unprovoked decisions of millions of people across the country. Based on the "shiftless homeowners" theory as the cause of the housing collapse, people have collectively, suddenly, and organically become shiftless homeowners over the last few years with no variable causing this to happen. Logically this is clearly untrue. Or to put it a better way, it is undoubtedly true that there have been shiftless homeowners over the last few years but shiftless homeowners are not the cause of the systematic housing collapse. If shiftless homeowners were the cause of the collapse, then why didn't it collapse long ago? Why wasn't the shiftless homeowner a problem before? Because the system (including the lenders and borrowers within it) was previously set up to be protected/insured properly against the failures of a controllable number of "shiftless homeowners." People who had inadequate economic backgrounds which did not predict success as homeowners were simply not allowed to buy homes.

Call this a "patronizing" stance if you like, but the fact of the matter is that it needs to be tough to get loans because people really do need to be protected from their own inadequate understanding of finances. Sadly, this perception that this is "patronizing" to essentially protect people from making large financial decisions that they are unlikely to be able to fulfill is one of the main obstacles to implementing better, smarter regulations. But what people who believe in the shiftless homeowners theory need to realize is that getting a bad loan is even worse for any single individual than it is for the lender or for the system. And so nobody wants a loan that they won't be able to later afford. People will understandably not always understand finances and risks and the legalese of mortgage documents, but they know that they do not want loans that the calculus says they will have trouble affording. A person may want a $350K home, but the loan must be set up using the basic calculus that decides if this person's financial history says that he will be able to afford this loan. If the system is not set up for loans to be distributed like this, then you cannot blame the homeowners, not solely. And when the problem is systematic, it's even more dishonest to blame the homeowners. Yes, you can blame them for being ignorant and not understanding what they are getting into, but that blame can only go so far. And besides, eventually, when the weight of millions of foreclosed homes causes the bubble to burst, that blame on those people runs hollow because now we're all affected. When this happens, you must conclude that it was the system that is broken, the system that allowed these loans to go through for these millions of now delinquent lenders.

Shiftless homeowners should only ever be a problem to themselves. Banks always have insurance against shiftless homeowners and in a regulated system the housing market would never collapse under the pressure of too many shiftless, delinquent homeowners. But here they collapsed, and when it happens on that large a scale you can't blame the homeowners anymore. You have to start asking "why were they given these loans to begin with." You have to ask "why were these lenders allowed to give such terrible deals to people?"
Obviously, there are real people who defaulted on loans inside of the market. So the person (typically a modern conservative) who preaches that people need to take "personal responsibility" for these problems -- that conservative is right, but only on a very superficial level.

Again, something very big happened here - foreclosures and bankruptcies on a level that far exceeded anything we've seen before. When that happens, the problem is not "shiftless homeowners." The problem is that the system is stacked against homeowners, creating more homeowners unable to pay than before. It is basically planned failure of a certain number of mortgages. Of course, they always plan for some failures, but here the plans went to an extreme that placed no value on the stability of the market. It was all lend and make money now, deal with the consequences later. "We plan on some people failing but we can make money off of that. If we can make money on that, then it's in our interests to make more deals, even those we know more of them will fail. How many can fail before the system collapses? Let's test that limit..."

In recent years, lenders borrowed money that had interest rates which grew at unprecedented rates and the borrowers often didn't completely understand any of it. And millions of people were given mortgages above what they'd demonstrably be able to afford. In the past, these two basic things did not happen, not on this level. In the past, people also didn't really understand everything in their mortgage contracts, but a more regulated system meant that they could trust that their contracts were set up for them to reasonably succeed. In the past, too, there weren't as many of these people who didn't understand their mortgages because the market would tell more people that no, they can't get a mortgage. But in our modern laissez faire economic climate, these people had a huge target on them. In order for the mortgage industry to grow, they needed to bring in more customers. They did, but the new customers were unsuited financially to getting the loans. Their income said this. Their credit history said this. And yet they were given loans. Now, everyone who owns a home -- even those who have paid faithfully -- have been hurt by these practices. You can blame individual delinquent buyers if you like, but anyone with any logical sense will clearly see that this is a broad, macroeconomic problem that goes beyond the shiftlessness of individual slackers.

As Balzac said: "Behind every great fortune is a crime."

Gary Robbin's post wins I think.

The expansion of the Community Reinvestment Act is what did us in. Banks would never make lousy mortgages unless they had a nice liquid market to dump them on if they went sour. Thus Fannie and Freddy. And everyone got a peice of this. Homeowners had their value go up. Minorities that couldn't get a house, got a house, banks got business and bonuses, realtors boomed, home builders got a bump, even automakers got a bump because of all the home equity loans that became available. There's no person in America who did not reap some sort of artificial and temporary benefit from this Act. Until now.

There's a wonderful NY Times article on this here:

http://www.snopes.com/politics/business/easescredit.asp

Note the date on the article.

Utinam populus Romanus unam cervicem haberet!

-Caligula

Hardly a fool-proof investment plan, because how could such a thing exist, but for its simplicity my favorite piece of investment advice is thus:

If you can't draw what the company does in crayon, don't invest in it.

We need reform, I'm surprised anyone is opposed to it. I have issues about the current legislation, but when don't I? I did an interview with our local news on the exclusion of auto-financing and wrote this pro/con article after reading the bill and speaking with the FTC: http://kcbbb.blogspot.com/2010/01/is-new-consumer-financial-protection.html

About Wall Street: In my opinion, any type of broker is superfluous. If you like them, fine. If you don't like them, you don't employ them. Only on Wall Street have they made themselves integral to a business process and all but unavoidable. Whoever created "credit swaps" was a diabolical super-villain mastermind.

I found this article about financial fraud to be appropriately angry and informative: http://scienceblogs.com/goodmath/2010/04/shocking_fraud_from_financial.php

I have so much to say about this issue, but I should probably save it for work.

I wonder how much time Gary Robbins put into his post; I also wonder how he got so much of the information wrong. (OK, I really did not wonder for long, professional spin doctors have been attacking the CRA and people like Gary are the result)

To start, it is the "Community Reinvestment Act", OK?
Look, you are not convincing me of anything if you cannot even get the name right. And the act was put into place to stop the practice of 'redlining' or 'blockbusting'. It had, and has, nothing to do with the current crisis other than being used by talking heads to blame something other than deregulation.

You can read about it, and the 'controversy' here:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act

I agree with your excellent essay, and with the movie's position as you have described it. Credit default swaps and other such contrived instruments should be abolished. However, there seems to be a misconception out there that betting that an assset's value will decline is somehow shady per se. In economic nomenclature, buying an asset because you think its value will increase is called "buying long." Its counterpart, based on the belief that the asset's value will decline, is known as "selling short." In this case, assets are borrowed from a third party with the goal of repaying them later with assets purchased at a lower price. There is nothing intrinsically better or more moral about buying long than about selling short. In the first case, one buys low and sells high; in the second case one sells high and buys low. Other types of transactions include "puts" and "calls," which are options to sell and buy, respectively, assets at a particular price. The put is a bet that the asset's value will fall, at which point the option is exercised. A call is a bet that the asset's value will rise, at which point the contract will be exercised. For example, one contracts a put at $5 per share. This is an option to sell the stock at $5 per share. If the price declines, say, to $3, the option is exercised by buying the stock at $3 and selling it at $5 to fulfill the put contract. The stock is not owned when the contract is made, and it is only owned on paper when it is bought at the low price and immediately sold at the higher one when the put is exercised. It is the same process, mutatis mutandis, for calls. It can be shown mathematically via the Efficient Market Hypothesis, even in its weak form, that financial markets function more efficiently and assets are valued more accurately if investors have a variety of instruments of this sort to trade. Moreover, none of these practices is remotely new; they are about as old as stock markets themselves.

A caveat, however, regarding the reliability of the Efficient Market Hypothesis, and it has to do with how economists prove their theories. It can perhaps best be conveyed by a joke--or parable--that made the rounds at the Stanford economics department when I was doing graduate studies there.

A chemist, a physicist, and an economist are stuck on a desert island. The only food they have is a can of beans with no way to open it. The physicist says, "Let's put the can under that tree and then shake the tree. One of those heavy inedible nuts will fall onto the can and break it open." They try, but it doesn't work. The chemist says, "Let's put the can into the sun. The sun will heat the contents of the can, they will boil, and the can will split open." They try this too, but the can does not open. Then the economist is asked for his solution. "First," he says, "assume we have a can opener."

Roger,

You should also be concerned about the Hollywood futures exchange that is being run by Cantor & Fitzgerald. If you value the movie making industry (and I'm sure you do), then this also cannot come to pass. It will be another bust possible bubble, full of inside traders who will undoubtedly crash that market in return for insurance payouts just like the credit default swaps placed on foreign economies (ahem, Greece). It would mean utter destruction of Hollywood movie making as we know it.

Another subject based on neglect, lack of foresight, lack of governmental control and regulation, disrespect to life and a focus on profits:

http://www.theage.com.au/ffximage/2007/12/09/OIL_ST_wideweb__470x298,0.jpg

Ebert: That photo is heartbreaking.

My anecdotal experience, worth what you paid for it, is that there have always been greedy bastards, but coming out of World War II there was a generation of managers (the first managers I worked for) who had been instilled with the idea that we are all in this together. Offshoots of that idea included the the sense that companies had civic responsibilities and responsibilities to their employees. That ethic has largely eroded away, from the top down, as WWII fades from memory.

I don't wish another such global conflagration as WWII on us, but I think that is what it would take to unite us in common causes rather than separating into selfish causes.

As to the specific triggers of our current circumstances, I would urge those who blame the Community Re-Investment Act or Fannie Mae to read the comment By Mark Hughes on May 23, 2010 5:06 PM, and respond with your own facts and their sources, if you doubt his.

It is great how this goes right to heart of things.

Ordinarily, I'd be suspicious of the prostitute story in this context. It's a sort of Michael Moore move to try and demonize the particular target, to use ad hominem attacks and generate emotions about tangential items. (Which makes for an entertaining movie, but not something people should base their views on.) But in this case, I think it makes sense to discuss the other illicit actions of these figures. Because there's a kind of social pathology at the heart of this problem. Of *course* people will try to make money and of course, in capitalism, they may be somewhat unscrupulous. But this article--and some of the others I've read--really suggest there is a much more rotten core than that. Because we are talking about people who are borderline grifters--sociopathic people--without a sense of social responsibility. And there are always people like that. Naturally! But they don't have the enormous influence that Wall Street bankers and traders have.

When powerful people within a society lose any interest whatsoever in the welfare of others who share their society then you have a society where extreme conflict is inevitable. That's a society in decline. You have to have laws. But you can't keep social order by threatening to punish everyone--because you can't punish everyone. There has to be some ordinary sense of decency or things fall apart. I think that's what's happened here. And I also think that it is the culture of these Wall Street institutions that encourages it.

The U.S. government is--at least right now--the only entity powerful enough to alter this downward slide. But after the Citizens United case, is anyone going to step up? If Obama won't do it, and the current congress won't do it, I do despair.

That means penury for a lot of us. Eventually.

I hope this movie wakes people up.

Mr. Ebert, have you heard of the book "The Spirit Level?" It seems that societies which have greater inequality between rich and poor also tend to be less prosperous and healthy. In fact, even the RICH people in highly unequal countries tend to be more stressed and unhealthy.

The really interesting thing is that this equation holds true regardless of whether a society has high taxes and high social programs (like Scandinavia) or low taxes and low social programs (like Japan). A large gap between rich and poor has a corrosive effect on society, even for its richest members. Social programs alone do not solve the problem: the real problem is that the rich must feel some sense of duty to the poor. It's a cultural problem.

Of course, this is wildly unpopular stuff in America, where the size of the gap between rich and poor is viewed as a benchmark of capitalism. But the authors are epidemiologists, not sociologists or economists. Epidemiologists just look at the numbers, and that's the pattern the numbers show us.

The "Masters of the Universe" are a warning sign of creeping return of medievalism in our society, where the wealthy and powerful feel no connection or obligation to the peasants except that of a Lord to his servant. We despise this particular set of "Masters of the Universe", but we still love our greedy ostentatious wealthy class. There are entire TV shows devoted to actually helping celebrities show off their obscene wealth, after all.

"The Stately Homes of England,
How beautiful they stand,
To prove the upper classes,
Have still the upper hand."
- Noel Coward

I'm glad the picture of Spitzer was removed. While I can understand if he was in the film, I'd hope he wasn't.

His presence would be distracting for one.

For another, as I argue here:

http://albanyexile.blogspot.com/2010/01/chasing-rats-brief-thoughts-on-eliot.html

and elsewhere on my blog, I find him to as New York Attorney General be a part of the problem, not part of the solution, on Wall Street.

Wall Street, I argue, needs calm and sober adults, not "sheriffs," to regulate and monitor it.

-The Albany Exile

Roger, I'm not a big fan of regulation, or anything else done by the government (including health care), because the government doesn't do much of anything all that efficiently. Never give the government anything to do if anyone else can do it.

On the other hand...if we don't reinstitute some sensible regulation where the masters of greed are concerned, is there any reason to expect behavior from them that is within screaming distance of ethical? I suppose bringing back dueling would do it; shooting or skewering some of these con artists might help encourage the others...

I've just come to the somewhat strange realization that the majority of my political education comes from a comedian and a movie critic. I don't point that out to say it's a negative thing, just something I personally find interesting. Anyway, anyone who has seen more than a handful of episodes of "The Daily Show" will know that Jon Stewart is far more than just a comedian, and anyone at all familiar with your work knows you're much more than a movie critic. Besides, even if Jon Stewart were just a comedian, or you were just a critic, both of you would still be more qualified than ninety-percent of the pundits on FoxNews.

And to the inevitable fool who does say Roger Ebert is just a movie critic, and what right does he have to comment our country's financial situation, let me ask you this: What do you do for a living? If you work in an office, are the only things you have opinions on pertaining to office work? If you're a dentist, are your only concerns about oral hygiene? No? Then don't talk.

Anyway, Roger, keep writing, because even though I feel like some of this may be a little over my head, it's all information that people genuinely need to know. And between this entry and some of the more illuminating comments - especially Mark Hughes' - I know I'll have some excellent fuel for a debate with a coworker later. We routinely discuss politics even though we're on completely opposite ends of the spectrum, and although he typically has more facts and figures (I use those terms loosely) to back up his arguments, in my opinion I usually have reason on my side. Tonight, I shall have both.

Ebert: "That leads me to the matter of Financial Reform. We need it. We need to return to an era of transparency."

I agree. Transparency would be wonderful. Too bad we're currently in the iron grip of one of the most opaque administrations this country has ever seen.

By the way, who did you vote for in the last election?

Ebert: Obama. God help us all if McCain and Palin were running things.

Sure, some of those home mortgage borrowers may have been "shiftless" (does that include the many would-be speculators hoping to flip their properties for quick profit?), but probably many more of them were ordinary people with low incomes and/or bad credit histories who were simply hoping to achieve "The American Dream" and own their own homes. They were all too eager to sit down at the poker table with Wall Street sharks like Fuld but forgot the sage advice of the professional gambler: If you can't tell right away who the chump is, it's You.

I'm glad you didn't repeat the tweet "Wall Street brought the world down to its knees", which couldn't be further from the truth. Selling a relatively small amount of people homes who couldn't afford it (largely from high prices of oil) is just not big enough to bring down a $60 trillion dollar world GDP to its knees, and even if it were, just look at the numbers to see that it clearly wasn't the case.

The total value of the housing market (existing home sales combined with new home sales) was $785 billion in 2003 compared to $622 billion in 2008, which is only a $163 billion dollar decline at its worse. We only lost a few hundred billion dollars. When you look at the loss of new home sales, we spent $268 billion for new homes in 2003 and $134 billion in 2008. But our increase in oil spending was OVER FIVE TIMES greater than our loss in new home sales at $900 billion: or combined with existing homes sales, the aforementioned $163 billion dollars, the loss is compared to the $760 billion rise in oil expenditures: which is still FIVE TIMES greater.

Even if we had regulations on the mortgages, the high oil prices still affect everything from consumer spending and an eroded standard of living, forcing businesses to lay off workers and cut costs while the workers demand higher wages because they can't afford groceries and gas and other commodities. Indeed the high oil prices have caused the global recessions from the oil crisis in 1973 and in the early 1980's; so there's a precedence. The oil prices were just $11 dollars a barrel ten years ago, and then it shot up to $147 dollars a barrel in 2008: now $80 a barrel. Consumer spending accounts for 2/3 of the U.S. economy. High oil prices effect the price of anything that uses a truck to get the goods to the store: which is everything. That's going to effect consumer spending (along with the high price of gas), job losses, a want for higher wages (for the jobs that are still dangling), and then of course the mortgages and the securities based on those mortgages are going to falter, which they did right along with the high oil prices; go figure.

The solution to the last comment of mine, we need to mandate all new cars sold (not made) be flex-fueled cars. The reason it's has to be sold, is it has to affect the foreign cars too. Then they will switch over too (it's only about $100 in additional cost from non-flex fueled form), which will mean in 3 years hundreds of millions of cars on the road will be able to use a combination of gas/many forms of alcohol fuels.

On a side note: Brazil has done this, and 70% of their fuel is from ethanol, which means there has been a dramatic improvement in air quality. This means that I'm expecting very impressive performances at the next Olympics there. With better air quality, there's gotta be better athletic productivity; you just watch: the number of records set will be surpassed.

"Seems counter-productive to me. Why not solve these things at the popular, local level?"

How precisely does one regulate esoteric market behaviors like derivatives trading and credit swaps at the "popular, local level"? Especially since so many of these deals aren't confined to small geographic areas?

Ebert, I don't think it would make any difference who is in office. Democrat or Republican, I think the current financial situation would be the same.

Sir:

The truly astonishing thing is that you think Wall Street's bad behavior is *new*.

Stockbrokers, mortgage brokers, and realtors, like used car salesmen are *salesmen* first. If it's convenient and helps the sale they may do you a favor, but they're here to sell you something and get a commission.

If you know what you want, you might not get taken too badly, but if the government didn't tax savings and hold down interest rates you'd be better off with a nice bond portfolio, held to maturity.

As for the financial meltdown, I don't think it was any one thing. It was an accumulation of things, each innocuous. Many of those things were governemnt initiatives, going back to the Carter administration and before. Finally came the straw that broke the camel's back.

Roger,
You are too old to be this naïve and too smart to be so dumb. How can you think that MORE government is the solution? Wake up man! The Federal government is not some knight in shining armor.

Michael Lewis exposes the illusion of regulation in “The Big Short”: Wall Street is populated by alpha male types who (whether you like them or not) are smart. The investments they sell are assessed for risk by employees at the ratings agencies like Moody’s and AM Best. The guys at the ratings agencies aren’t smart enough work on Wall Street or understand the inherent risk in the derivatives and CMOs that Wall Street sells and they are tasked with rating. Meanwhile, at the bottom of the IQ food chain is a federal bureaucrat recently promoted to the SEC from your local DMV. This unmotivated dolt is responsible for protecting the investing public from fraud. Trouble is, he’s so busy ignoring multiple warning letters from RIAs about Madoff’s Ponzi scheme and surfing the internet for porn that he can’t find the time to regulate his way out of a wet paper bag let alone understand complex financial instruments. And why should he? As a government employee he works on a pay scale unrelated to his job performance, is almost as difficult to fire as a member of the New Jersey teacher’s union and guaranteed a tax payer provided pension for the rest of his life irrespective of the market performance that the rest of us need in order to grow our 401ks and IRAs.

Spare me the “government needs to teach these greedy capitalists a lesson” crap. Without Fannie and Freddie “guaranteeing” mortgages made by their shabby standards (yet more government overreach) these now defaulted mortgages would have instead been underwritten by community banks or a local branch of a mega bank responsible for their own P&L.

Roger, I really find it hard to believe you think that there would be such a difference in A McCain presidency. The differences would be cosmetic, just like when Bush was supposedly going to go after gay marriage or Obama was going to get rid of don't ask don't tell. The only difference is the perception of the world, if Obama achieves much, it will show use the power of PR over substance.
Obama makes jokes about drone attacks while upping these monstrous machines' use in the military, he doesn't give a bleep about the largest industrial disaster in history(oil "spill"), he represents the interests of corporations over people. Basically he's Bush with black face and an eloquent way of speaking.
Isn't it interesting how the antiwar movement dropped of the face of the earth once the Dems took power? These people simply used the good nature of many Americans to take power, now that they don't need them, they stop funding and hyping the antiwar movement- all while the war is more and more futile.
The one student in my high school class to go on to a job on Wall Street was also the biggest cheater, these ppl are crooks and they have ties with Obama's admin at all levels.
He need independent thinkers in power, maybe Rand Paul is one, the way the corporate MSM is going after him and taking things out of context really gives me hope that he might be reform oriented, just like when the MSM finished off Dr.Dean . We need a new revolution in this country, to take back this great land from the evil international corporations and elite foreigners that now control our once great now defunct democracy.

I remember being really annoyed when I read 'Gone With the Wind' when the author had one of the few opinions being offered by a black character to be a nostalgic defence of slavery. Of course, some slaves did deplore the end of slavery, which I explain as a highly advanced case of the Stockholm Syndrome.
For some reason, this comes to mind whenever I read a conservative defence for a deregulated market. Some people are comfortable being slaves.

>Michael Ellis

You are right on when it comes to the three aforementioned Frontline documentaries produced by Michael Kirk. I've rewatched them many times; studied them as I did the ten or so documentaries by Kirk on the Bush years. Although this most senior PBS producer has been awarded every every major journalistic award available, I still feel his excellent work is mostly under appreciated by the general public. And, as you say, it's so readily available.

Concerning the plague of so called toxic derivatives, was anyone else taken by the statement that the total size of the derivative market was somehow estmated in the $600 trillion range? Read elsewhere that their value is exactly what the name implies--derived from the "notional" value of something else. Then, as I was reading further and my eyes were beginning to blur, it dawned on me--How does that compare with the total financial worth of the planet? A quick Wiki check and I came up with a $200 trillion approximation. Now I'm frustratedly left with the notion that if derivatives are somehow valued at 3 times the worth of everything else on earth, we're in a world of some kinda' shit. But maybe I'm just notionally confused.

Any idea when this documentary will be released in US?

Ebert: Autumn.

Three questions:

Question #1 for the people who think the housing bubble had nothing to do with Bush: have you ever seen the chart of house prices over the past 50 years? Did you notice the HUGE spike after 2000?

Question #2 for the people who think the financial crisis was caused by Fannie Mae and Freddie Mac: did you ever ask yourself why banks were also failing in Britain and Europe? They have neither Fannie or Freddie. They did, however, adopt Wall Street's business practices, encouraged by Alan Greenspan who, at the peak of his popularity, was actually travelling the world selling the wondrous benefits of financial deregulation to other G-8 nations.

Question #3 for the people who think the financial crisis was caused by the Community Reinvestment Act: are you proud of yourself for finding a way to blame the financial crisis on poor black people rather than rich white people?

You have to love the bald-faced dishonesty of the people who think that McCain could have prevented the housing bubble if he had neutered Fannie Mae and Freddie Mac in 2006. Look at the house prices in 2006: the bubble had already reached its peak! Unless John McCain had access to time travel technology, it was IMPOSSIBLE to prevent the problem by then.

A cogent piece that explains what happened as well as an analysis I've read.

"We need to restore a market of investments that are what they seem to be."

I call this Capra capitalism. In Frank Capra movies the capitalist was usually some guy who owned a factory or a mill or similar. It was a place that made REAL stuff, that employed local people to make these REAL things, that everyone else actually needed. Then as often happened in a Capra film, if things went bad, the capitalist faced losing his home and wealth and had a revelation that led to him being nicer to all concerned.

Real capitalism hasn't been like this for a long, long time.

Tom Dark: “that prostitute's pic looks kind of ... what's the word... embalmed.”

I have no doubt that she is a very nice prostitute, but I think the right word is one-dimensional. That’s what caught my eye. Probably a very nice person, but not my type. Although one-dimensional is the first word that comes to my mind when I think of the traitors that she unwittingly did business with.

Stop and think for a moment. This lady is an entrepreneur. She hasn’t stolen anything from anyone, as far as I know. She hasn’t betrayed her country. And yet it is she who could be arrested and placed in jail for her business practices.

The sexual aspect of all this isn’t lost, is it? I have been wondering lately why everyone is so angry—and at all the wrong people. I think it has to do with emasculation and impotency. We are powerless to do anything about it. (Although, we could send that entreprenuering woman and her employees to jail.)

Bizarre to the extreme. The President has two wars, North Korea, Iran, an enemy that came within a hair’s breadth of decapitating the US government, etc, etc, etc to contend with, little support, and a lot of anger directed at him. Why?

Where are the ethics, standards, personal integrity and values that made this country great in the first place? Make these traitors walk the length of Arlington cemetery.

Can anyone tell me why a corporation or a union is allowed to contribute to politicians? I mean, I know why they are allowed. But I do not know why we are allowing it. I feel as if I have very little freedom in the land of the free. Incredibly, it seems the congress has very little freedom, as well.

Roger,

In addition to Inside Job itself, This American Life expanded on the story a bit through their insightful reporting. You may have already heard it, but I'm curious how much the documentary and TAL borrowed from each other? And I agree on one thing absolutely. Investment banks should not be allowed to bet for or against their clients. It doesn't get more clear that this is a conflict of interest...

Hedging or "shorting" is not necessarily an evil thing. A brewery making a bet in January that the price of barley will rise in August is protecting itself in case there is a drought and the price of barley goes through the roof. It's not like the brewery is trying to profit by failing. I don't know what the comparable situation is for financial institutions but I do agree that the events of 2008 were unacceptable and something needs to be done to make sure it doesn't happen again.

Thank you for bringing this documentary into the spotlight. Financial reform needs to happen baddly and the Glass Steagall Act must be reinstated. Otherwise, we will be set back a hundred years and our society will be ruled by robber barons, not elected officials. Ironically, our president (whom conservatives incorrectly call a radical, and who supposedly knows how to play Chicago hardball) doesn't seem to have the balls to take on the big money.

I voted for him like you did but I swear I won't do it twice if doesn't make congress reinstate Glass Steagall. You shouldn't either!

In the Audacity of Hope, Obama came across as someone who tried to be everything to all people. He probably knows very well that he can only pretend to be everything to all people, and maybe that's why he talks about getting tough on Wall Street and at the same time shies away from real financial reform. I wish it'd be the other way around, and while he talked about how nice Wall Street bankers really are, he'd put a cap on banks and forbid them to play roulette with people's savings.

"I call this Capra capitalism. In Frank Capra movies the capitalist was usually some guy who owned a factory or a mill or similar. It was a place that made REAL stuff, that employed local people to make these REAL things, that everyone else actually needed. Then as often happened in a Capra film, if things went bad, the capitalist faced losing his home and wealth and had a revelation that led to him being nicer to all concerned."

Interestingly enough, the way Marx defined a capitalist was not just anyone who owned a business or made money, but specifically someone who profited just off the exchange of capital, without producing anything. Now, obviously we need some ways of handling money besides keeping it under the mattress, but the market got a little too far tilted in the pure-capital direction.

The problem is that the market is so complex. You can't just ban derivatives because there are some legitimate uses for it. Short selling also (in theory) can work to prevent big bubbles- you short sell a stock you think is overvalued, that can cause a slow decline as opposed to a sudden crash.

The argument against further regulation seems to be "federal regulators are in the business' pockets", but who does that leave? Somebody has to watch the store.

I'll depart from what Roger says here in just two respects. The first: What Washington did that allowed this willfully destructive financialization of the American economy to occur was not a mistake but deliberate. The decision was made more than 30 years ago that the big money in constructive enterprise would be made in other countries--the Asian Tigers, China, possibly Latin America. Certainly not in Europe and the U.S.

Therefore there was no longer any urgency behind the effort to maintain a viable, forward-looking economy here. All that remained was to open the doors to the long-term plunder of the wealth that had been built up and broadly distributed here in the years 1940-80. This the elites have largely accomplished, under both Democrats and Republicans.

My second departure from Roger's excellent analysis (and maybe it isn't really much of a difference)is from his statement that the financial reform moving forward in Congress is a step in the right direction. I'd say it's a huge leap in the wrong direction, precisely because it gives the impression that some kind of moderate measures are being implemented to at least partly deal with the problem. As such, it ONLY provides cover for the continued plunder of our economy and thus ensures an even bleaker future.

Finally, I'd like to amplify one point: Early on, when the meltdown was merely a subprime crisis, the government could have stepped in to bail out the subprime mortgage holders, rather than the banks. In this way, the whole mess could have been avoided, and the ordinary working people hit hardest could have kept their homes. All those hinky derivatives would've been secured, and the credit freeze-up would never have happened. BUT, as we now know, the banks would have taken a big hit under this scenario because they were BETTING BIG ON A MELTDOWN! Their gold-plated futures crucially depended on a gargantuan wealth transfer to their own accounts that they engineered based on the wide-scale destruction of the world economy that they had rigged up.

Otherwise, I'll agree with so many other commenters here: Roger provides one of the clearest and most compelling analyses of the crisis.

I am blown away by this right now! Mainly because in Cleveland where I worked as a processor, all the people on the ground level who had anything to do with these deals is being PROSECUTED! From the sellers, to the buyers, to the workers at the title company, processors, loan officers... We're all bewildered by the viciousness in which we have been attacked. The bulk of the charges against us are defrauding the banks, conspiracy to deceive the banks, and any other BS the prosecution can tack on. Because there are so many of us, we are being charged with RICOH. Basically the assumption is that we all got together to cheat the banks into making loans. I almost laughed when I read the charges against me. Cheating the banks???!!! That's a stretch! Many of us are broke, so the court has appointed us attorneys. No one made much money if any at all. I know I certainly don't have any right now, but if you read the swill that was printed about me in the Cleveland newspaper, you would think that my husband and I were running a real estate crime ring! That article was total utter nonsense, with 1 or 2 facts thrown in and 90% fiction. It's good to know somebody out there has investigated the TRUE cause of the problem. Thank you for this, but I am quite sure the truth won't make front page news!

Government policy may shift against individual miscreants like the dishonest traders who play poker with other peoples' money and absorb the reward but not the risk. Maybe.

However, it will never shift against "big money" per se. The problem is that in our economic system, The Investor Is King. Repeat that after me, because it is the source of all fiscal policy. The Investor Is King.

The value of work is no longer important. Economic policy is geared toward ensuring maximum return on (and safety of) investment capital, even if these policies actually harm the ability of wage-earners to support themselves.

One of the only reasons the bank executives are taking such heat is that they harmed the interests of investors. But the problem is bigger than these miscreants. The miscreants were, in the end, only doing the same thing the investors were trying to do, albeit more effectively. How many investors feel bad about benefiting when corporations slash payrolls and increase dividends?

This is why no one going to do anything about rampant outsourcing: it's good for the economy! And why is it good for the economy? Because it increases GDP, and profits, and dividends, by reducing costs. All of this means the worker loses, and the investor gains. In other words, we have decided that a "good" economy is one that provides maximum investor benefit.

Once more: The Investor Is King. Understand that, and you understand why our economy works the way it does, and why it will not change.

PS. I do not claim innocence. I am an investor too. And that's what makes this problem truly intractable: all of us who make enough money to save for the future are part of it.

I've said it before and I'll say it again:

Wall Street cannot even be trusted to play an honest game of Monopoly.

Those who blame Fannie and Freddie should read this article: http://www.mcclatchydc.com/2008/10/12/v-print/53802/private-sector-loans-not-fannie.html
I know you won't believe you're wrong. Can't let the truth get in the way of a narrative that supports your political beliefs. And if further proof is needed that the markets are not almighty and big business owns the government, we have an unprecedented environmental disaster in the Gulf of Mexico.

Richard Fuld(top picture)

Just checked out Richard Fuld @ newsmeat.com. He donated heavily to various campaigns, but mostly to the Democrats(63%), although it appears Hillary and Chris Dodd rejected his last pledge.

Every year big Dick did contribute consistently to The Securities Industry and Financial Markets Association. The currently outraged SIFMA has disowned the Dems, is now big bagger backers. Their stated goal is to combat "the populist overreaction" against Wall Street's role in the global financial crisis. It is also well known for its Madoff family connections. Bernie sat on the board of directors for years, and gave nicely from his embezzled stash to SIFMA(as well as the Democratic Party). Brother Pete also served two terms on the board. And Bernie's niece Shanna, his COMPLIANCE attorney, served in a similar capacity for the SIFMA Executive Committee's Compliance and Legal Division. Although a bit shaken by recent events, SIFMA still manages roughly &85k monthly for polling, lobbying, rightist think tanks, and political ads to counter "the current lynch mob mentality" against Wall Street and Big Business in general. And they state that contributions are on the rise as "the outrage of the American people is beginning to be felt by Congress." Oddly Shanna, Pete, or Bernie don't seem to have much to say.(mostly Wiki)

Hi Roger,

I'm curious if you've seen the article linked on Drudge for the last few days which reports Sen Judd Gregg (R) as saying that the Financial Reform bill is a "disaster".

Gregg's reported concerns include:

- the agency that will be created to manage the reform will be a "Fannie and Freddy on steroids". (That can't be good!)

- the bill does not control derivatives

etc.

Would you consider the possibility that the Republicans have been opposing the bill because it's worse than ineffective or corrupt or expansionist government (which it is, all three)? That the GOP is opposing it because the bill will make the Wall St. situation (risk) considerably worse? That's a good reason to oppose the bill, isn't it?

I have to take exception to the article's statement that "From Roosevelt until Reagan, the American economy enjoyed 40 years of stability, prosperity and growth."

During the presidency of Jimmy Carter, the American economy was suffering from a recession and outrageous inflation. The rest of this entry may be entirely true, but the idea that the American economy in the late 1970s was growing and properous is patently ridiculous.

Michael Wong
There are entire TV shows devoted to actually helping celebrities show off their obscene wealth, after all.

Celebrities have “obscene wealth”?

Evan Waters on May 25, 2010 8:46 AM explains Karl Marx, and in doing so, explains what “obscene wealth” is: “Interestingly enough, the way Marx defined a capitalist was not just anyone who owned a business or made money, but specifically someone who profited just off the exchange of capital, without producing anything.”

Celebrities, in general, produce something. Therefore, their wealth is not obscene. Goldman Sacks, on the other hand, produced little—discounting their crimes against humanity. In that regard, they have begun a process which will accelerate the suffering of humanity for untold years: lack of decent housing, drinkable water, and starvation directly. All attributable to Wall Street's culture of ruthless, self-centered greed.

Unfortunately, Shakespeare was more correct than wrong when he wrote: The good that men do dies with them. But the evil men do lives beyond them. (no quotes)

Ebert: I recommend that quote to a few conservatives here who place such trust in the working of the market.

For the record, conservatives believe in a free market. Not a free-for-all market.

By Nick Thiel: As Balzac said: "Behind every great fortune is a crime."

Oprah Winfrey is a criminal?

US historian William Appleman Williams wrote on how the tragedy of American foreign policy occurred when the US PTB came to believe that any affront to American economic prosperity was seen as an attack on the US in total. If such a thing is true then these folks at GS etc ought to be tried for treason.

If it makes you feel any better Al, I bet the lawyers will still make money.

What's so fascinating about this is that it's a refutation of classical economics. The view that "the invisible hand" of self interest can ensure optimality is clearly false. Maybe this is simply because of the inequality involved in the system. If a CEO is purely self interested, it does not matter if investors are also self interested; he has so much more control over everything.

Even if the Financial Reform Act is insufficient, there's the slight hope that those with power have realized that they are not completely immune to the system.

There was a show on HBO a few years ago called "The Wire." It's second season dealt mainly with the economy, and toward the end had a character say the following:

"We used to make shit in this country, build shit. Now we just put our hand in the next guy's pocket."

I don't know about the rest of you, but to me, the American Dream never included not working.

The ironic thing about the failure of Alan Greenspan's "rational self-interest" model of market self-regulation (apart from the remarkable fact that Greenspan was forthright enough to publicly admit his error, unlike so many other adherents to this belief system) is that it makes the same fundamental error that Karl Marx did: it ignores the incompatibility between individual self-interest and collective self-interest.

The market self-regulation theory relies on the naive notion that the executive's self-interest coincides with the self-interest of his company, its employees, and its investors. In reality, it is quite possible for an executive to enrich himself at the expense of his own employer.

This is really no different from Karl Marx's equally naive notion that workers in a communist system will expend their effort toward the collective interest of society rather than their own individual self-interest.

I have heard it said that if you go too far right, you end up meeting the people coming around from the left. As time passes, this seems more and more true.

The ironic thing about the failure of Alan Greenspan's "rational self-interest" model of market self-regulation (apart from the remarkable fact that Greenspan was forthright enough to publicly admit his error, unlike so many other adherents to this belief system) is that it makes the same fundamental error that Karl Marx did: it ignores the incompatibility between individual self-interest and collective self-interest.

The market self-regulation theory relies on the naive notion that the executive's self-interest coincides with the self-interest of his company, its employees, and its investors. In reality, it is quite possible for an executive to enrich himself at the expense of his own employer.

This is really no different from Karl Marx's equally naive notion that workers in a communist system will expend their effort toward the collective interest of society rather than their own individual self-interest.

I have heard it said that if you go too far right, you end up meeting the people coming around from the left. As time passes, this seems more and more true.

By Glen Raphael on May 23, 2010 3:09 PM

...Magnetar's wanting "risky" bundles and Goldman selling "shitty" deals stops seeming in any way nefarious. We simply have no evidence that the price didn't reflect the value.

Uh, no, Glen. What you fail to take into consideration are the rating agencies who rated the mortgage-backed securities and the derivative CDOs as investment grade because of their inherent diversification, and the financial industry "regulators" who did no such thing.

...

When you buy *any* security, the person who sold it to you is in effect "betting against" you. The sellers are gambling that the security will be worth less to them in the future than what you are willing to pay for it now. If they didn't believe that, they wouldn't let it go so cheaply!

Uh, no, Glen...not really that simple. You fail to account for the time value of money: A dollar today is (almost) always worth more than a dollar tomorrow. There are differences of opinion, of course, about any security's intrinsic value, but the time value of money is the basis of the practice of lending, so kinda longstanding and important.

Your "it's human nature to want to find somebody to blame," while certainly true, is both specious in this context and a reductio ad absurdum argument. Just because it's human nature to seek a scapegoat doesn't mean no one is to blame for things that go wrong. Taking home 10's or 100's of millions of dollars in income while producing nothing really worthwhile, or even tangible, is just not an honest living.

To Rod who was posted on 5/24/10 at 11:49 a.m., it took me the better part of an hour to write my comment that was posted on 5/23/10 at 4:06 p.m. When I wrote my post, there had been only two other comments that had been posted. You are right that the full name of the CRA is the "Community Reinvestment Act" not the "Community Redevelopment Act." I was in a hurry to finish my comment and missed that error. So your "gotcha" is accurate.

However, you didn't address the issue of how there was an explosion of risky mortgages issued after the Democrats took over the Congress in 2006. (I am not saying that George W. Bush was innocent; his administration was fast and loose with spending at the federal level.) With the vast expansion of money in the system, real estate was bid up to unsustainable levels. And sooner or later the piper had to be paid.

Gary Robbins asks about the "explosion of risky mortgages issued after the Democrats took over the Congress in 2006". Just how big was this "explosion", and what effects did it have?

The numbers tell a different tale: according to the Financial Times, US housing prices more than doubled between 2000 and 2006 (ie- the period when the Republicans had an iron grip on government), and began to DECLINE after 2006. Yet your model seems to be based on the belief that the housing bubble was inflated between 2006 and 2008, due to Democrat meddling.

I would ask how you correct your model to account for the numbers, but I doubt you have a model at all, other than "find an excuse to blame the Democrats".

//I don't know about the rest of you, but to me, the American Dream never included not working.//

Well, slave owners and Gilded Age "capitalists" might argue otherwise. Fortunes are generally made by people and spent by a person.

"For the record, conservatives believe in a free market. Not a free-for-all market."

They also seem to believe in pithy, vacuous slogans rather than solving problems.

See also: nattering nabobs of negativism; no child left behind; contract with America etc. etc.

Plenty of conservatives believed in deregulation when it seemed to be working. Whenever conservatism fails, though, the rats can't leave the sinking ship fast enough - "oh, that stuff wasn't real conservatism, real conservatism is... uh... something else..."

Any conservative has to begin by answering this point: that everything he says sounds like nothing more than a defence of whoever is the current aristocracy - rich people, white people, whatever. If he can't, why should anyone, anywhere, listen to him?

Most can't; and until they can, all the down-home, laconic, over-neat little put-downs are just another kind of hot air.

Thank you, Roger.
I'm happy to see progress being made in your interest and/or understanding of this subject.

The people of the United States need you to be better informed so that you can help everybody overcome being mis-educated, mis-informed, and mis-led our entire lives.

I've recently gone well past the limited focus of "Inside Job."

The commenter "By George" above made a good attempt to take you the next step to the source of our economic woes.

The penultimate source is that our government borrows all the money we use. Yes, absurd as it sounds, it's true. Our government borrows the dollars we use from private bankers. Since 1913.

The final step is knowing who the private bankers are.

I invite you, Roger.
http://www.EqualPartyUSA.org (also linked on my name above)

And here's a great video made years before the 2008 start of the "Financial Crisis." I'm sure you will be able to understand it. The question is how long will it take, how many sources will you need to get this info from, to believe it? My research verifies it.

http://justgetthere.us/blog/archives/The-Money-Masters-How-International-Bankers-Gained-Control-of-America.html

It's humorous that people of certain political persuasions keep trotting out distracting, politically-motivated arguments about the 70's, as if a recession under Jimmy Carter (which was primarily the fault of OPEC, btw) was anywhere near as disastrous and/or potentially economy-destroying as what has gone on since the 1980's.

Yes, there have been recessions. There always will be. There will always be market corrections, and nothing goes straight up forever. It wasn't until the fabric of oversight and regulations started being pulled apart thread-by-thread under Reagan, however, that we started getting things such as the S&L crises, the housing bubble and the world-wide economic meltdown that required Gov'ts (plural) to step in and restore order.

The best solution would be to give Elizabeth Warren subpoena power and start having public hangings. Short of that, it's time to start laying out responsible guidelines for the money market and revoking business licenses for companies that knowingly risk the collapse of civilization for extra digits on their bonuses.

That isn't socialism, that's enforcing and maintaining a free economy.

I don't think any serious economist would say the economic period from the 1930's to the 1980's was one of unremitting, stable economic progress. Anyone here remember stagflation, ala 1970's?

The financial industry experienced a boom and then a bust, just like many other growth industries. Anyone remember the dotcom bust, ala 2000/2001? I think it’s sadly humorous how people blame the financial industry for our economic woes as though its immorality stoked an apocalypse. It’s like a person who cuts his finger with a knife and blames the invention of steel, or the fat person who blames the fact there is so much pie available. What was the problem here? That banks provided cheep credit or that people love money? The financial industry has been one of the greatest sources of economic growth and tax revenue in the last 10 years. (Reality check liberals: the top 10 percent of the income bracket pay over 60% of the taxes, including the money for your beloved social programs. So whose country is it?)

Some more regulation to temper the excess? Sure. But let’s not kill the goose who lays golden eggs.

I teach at a university where the economics department is slightly to the right of Attila, I've had several students tell me over the years -- though fewer recently -- that they are "anarcho-capitalists." They believe government can do nothing right, and that business can do no wrong. They take the Gordon Gekko claim of "greed is good" as a mantra, ignoring what actually happens in that film. They speak reverently of Milton Friedman and Ayn Rand, and say things like "unions are bad because they don't add any wealth to the society." This would come as news to my grandfather (were he still living) who went into the coal mines around 1920, when he was eleven years old, because his father's legs were blown off in a coal-gas explosion, and the company agreed to let him keep his salary if he continued to work and brought his eleven and thirteen year-old sons into the mine with him. My grandfather left the mines after twenty-two years, at age thirty-three, with black lung, and the union he literally fought for was what gave him his pension. When his father was in the mines, in the pre-union days, he was paid in company scrip instead of U.S. currency. But I digress.

I've asked some of these students who say that government should "just get out of business's way" whether they think their local gas station should be allowed to dump oil instead of recycling it. Some tell me that if it's on the owners' own property, they should. I point out that that oil doesn't respect property lines and would end up in local streams and ultimately in the Chesapeake, thus damaging the crab industry. Then they say that people who care about that would patronize oil change places that recycle. So I point out that most people looking to change their oil don't have the time to inspect a garage's oil disposal procedures. Then they often say that businesses can set up their own certification and inspection procedures without "government interference." At that point I express wonder at their supreme confidence in human nature: to think that people will automatically act, not even in the interest of others, but in their own enlightened self-interest requires a faith in human wisdom that would make Pangloss look like a cynic.

The free market is a unicorn: a lovely, magical idea that no intelligent adult believes exists. Yes, capitalism encourages innovation. But innovation is change, and change is unpredictable. Corporations that achieve dominance in the marketplace cannot guarantee that they will always be able to maintain dominance through continued innovation, and so they will use other means to insure their position. They will form trusts. They will fix prices. They will crush or buy out competitors via marketing and via their access to government.

You see this again and again, whether it was Standard Oil in the gilded age, or Tucker, or ADM and farm subsidies, or the way that companies like Lockheed survived only by selling the military equipment that it didn't always even want, or even the Microsoft case. For those who don't remember, because Microsoft provided the operating system, they could bundle it with programs (Word, Explorer, Excel, and so on) that were all inferior to competitors' programs available at the time. They insisted computer manufacturers take the whole bundle, which meant that their competitors in those other programs could not compete: they had to convince the public to spend more money to replace a product they thought they were getting for free (when of course Microsoft was simply hiding the cost). While those other companies struggled, Microsoft used that time to gradually improve their products until they would actually be competitive. But U.S. consumers probably lost five-to-ten years of innovation.

I called the free-market a unicorn. Actually, the better analogy might be to say that capitalism is a standard poodle. Standard poodles are great dogs: bred as water retrievers (the reason for that ridiculous cut some show-dogs have), they are amazingly intelligent, affectionate, and can be be trained to do almost anything except be seeing-eye dogs (too curious, generally). But they are not natural, and indeed they could never survive in the wild because their hair never stops growing and they don't shed. After a year, they wouldn't even be able to see. Capitalism is like that: trained, disciplined, and groomed regularly it's a great system. Left on its own, without intervention, it dies and gets replaced by oligarchy because the goal of those who achieve a dominant position in an industry is to maintain that position at all costs.

When told that government can't do anything right, I point to the U.S. highway system, the Tennessee Valley Authority and electrification, the Apollo program, and just about everything we did during World War II. It amazes me that Americans who claim to be patriotic speak so ill of their government, which after all is representative of its people. Is the government flawed? Of course. And so is human nature. But as Churchill said, democracy is the worst form of government ever created, except for all the others.

Ever since Reagan, the small government, Grover Norquist types who talk about "Starving the beast" have worked hard to make government incompetent and destroy citizens' faith in it. Think of when Reagan appointed James Watt -- a fundamentalist who believed the earth had been created in six days, that human beings were given absolute dominion over it, and that Jesus was coming back imminently, thus bringing about the end of the world -- head of the EPA. That's a sick joke, equivalent to putting a vegetarian in charge of meat inspection. Or making couples ask for marital advice from a celibate priest. More recently, we've seen coal company executives put in charge of mine safety, chemical executives given powerful positions at the EPA, and so on. To say this is the fox guarding the henhouse is to understate the case. This is the foxes being given command of the whole farm. Cue George Orwell.

When the U.S. government achieved great things, taxes were much higher than they are now. Under Eisenhower -- hardly a wild-eyed red -- the maximum income tax rate was 92%. That's how you do things like build a national highway system, end polio, and start a space program.

When the history of the decline of the United States is written, centuries from now, historians will struggle to explain how American citizens were convinced to abandon their faith in their government and fellow citizens by corporations and their shills spouting a mixture of populist rhetoric and prosperity gospel. Who will ever believe that anyone could be so naive as to think corporations are more trustworthy than their own government?

The housing market in 2006 was continuing its buildup. It started to fall by 2007. What has that to do with anything? Democrats won control in the 2006 elections, meaning they took over control in 07. Was that your point?

I have no intention of supporting the Democrats, who have been far to friendly (read: Taking money and supporting deregulation) to big business. But, Gary, you really don't seem to understand what I said.

None of which, again, has anything to do with the CRA, which is what your first post wrongly blamed.

There's a reason to read Rolling Stone magazine. Matt Taibibi. After I finish one of his pieces on Wall Street, I make copies and distribute them to my co-workers. I think he deserves the Pulitzer Prize.

It's very simple.

+ We are a capitalist society. Capitalism selects for sociopathy. Therefore, the most successful in capitalist terms - the most wealthy - will be those who feel no empathy or interest towards anyone else, as empathy directly reduces potential wealth.

+ Humans are born with a finite amount of potential empathy for their fellow man. People who limit the scope of their life to their local area and family tend to be more empathetic. The larger the population, the less empathy there is to go around. Our national population only keeps growing, and...

+ Divisive politics from both the left and right set up a he said/she said game in everyone's mind, ensuring that the people cannot unite against the real problem, which is that this sociopathic class has taken over the country.

Unfortunately I have no answers. Communism is great in theory but that finite empathy thing breaks it. Capitalism is the best system we've came up with so far, but its lifecycle as a fair system appears to be ending. All animals instinctively pursue a certain social order. Humans seem to be born to be feudal.

Actually, financial deregulation had nothing to do with most of the derivatives Ebert is bashing here. Attempts were made during Clinton's term to regulate them not reregulate them. Moreover, derivatives are a type, not a thing (many things can be called a derivative) and they existed LONG before Reagan contrary to Ebert's article. Ebert should stick to criticising movies.....

Latley I find myself feeling hopeless when it comes to creating change in our government. The new health care reform bill and the financial reform bill are steps in the right direction, but we need more. Why don't people demand that the government act in the best interest of its people? It feels like the country is under the control of large corporations and banks, not the people. I am a 28 year old with 70,000 dollars in student loans, a giant mortgage that I shouldn't have gotten, and a tiny pay check from my job as a teacher out of which $500 is taken each month for my health insurance. I didn't even include in that my enormous credit card debt. Yes, I got myself into this situation and I am working hard to get out of it, but my situation was made possible by the current economic system that we live in. Because of my horrible financial decisions I will be working for a bank the rest of my life. How can our legislatures sit in Washington D.C. and knowingly betray us while telling us that they are working for us? I am sickened by the entire situation and I am deeply disapointed in the decisions that our federal government is making for us.

Hey Roger, I like to read old magazines as a way to test the analysis of the magazines and its writers. Anyway I came across this one which I thought especially interesting when read today. It’s from Business Week’s cover story called “How Toxic is Your Mortgage?” from September 2006:

“Option ARMs [option adjustable rate mortgage’s] were created in 1981 and for years were marketed to well-heeled home buyers who wanted the option of making low payments most months and then paying off a big chunk all at once. For them, option ARMs offered flexibility.

So how did these unusual loans get into the hands of so many ordinary folks? The sequence of events was orderly and even rational, at least within a flawed system. In the early years of the housing boom, falling interest rates made safe fixed-rate loans attractive to borrowers. As home prices soared, banks pushed adjustable-rate loans with lower initial payments. When those got too pricey, banks hawked loans that required only interest payments for the first few years. And then they flogged option ARMs -- not as financial-planning tools for the wealthy but as affordability tools for the masses. Banks tapped an army of unregulated mortgage brokers to do what needed to be done to keep the money flowing, even if it meant putting dangerous loans in the hands of people who couldn't handle or didn't understand the risk. And Wall Street greased the skids by taking on much of the new risk banks were creating.

Now the signs of excess are crystal clear. Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments. Most of these borrowers aren't paying down their loans; they're underpaying them up.

Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come. For one thing, banks can sell some of their option ARMs off to Wall Street, where they're packaged with other, better loans and re-sold in chunks to investors. Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities, says Bear, Stearns & Co. (BSC ) Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.”

And this was one of the few publications I could find who even did a story on the potential for danger. And yet they were still so so off about that danger. Just food for thought.

Michael Wong

Karl Marx [‘s theory] ignores the incompatibility between individual self-interest and collective self-interest. . . [and] that workers in a communist system will expend their effort toward the collective interest of society rather than their own individual self-interest.

The trick behind good governance is keeping the individual’s self-interest in accord with the collective interest. When the government has scoundrels such as these executed, it helps engrain the ultimate definition of self-interest into its citizen’s hearts and minds. Treason and crimes against humanity are capital offenses in the US.

On a happier note: Europeans built their Great Cathedrals for the benefit of a collective achievement. One sees a similar mindset in many parts of China—those where workers are making minimal financial wages while reaping incredible spiritual ones knowing that they are modernizing their country and allowing its greatness to continue.

Does it count as consolation that Reagan will be remembered as the worst American ever in history?

I wonder if after "winning" the Cold War we in the United States (and perhaps the rest of the West as well) will fall to what Alan Greenspan called irrational exuberance. There's no question that as a matter of orthodoxy, we're just as reflexively, indeed sclerotically capitalist as our Soviet adversaries were socialist.

The irony here is that many of the same advocates of deregulation vis-a-vis Wall Street consider themselves social darwinists. The strong live, the weak die. Well, if adaptation is key and the system hasn't worked, then it's high time for some creative destruction, don't you agree?

Think about it, Roger. The derivatives market alone is valued at 700 trillion dollars. I hate the trite analogies of cable news about how you could stack your absurd sums of money to the moon, but the simple fact that this sum of money represents the sum of America's productive capacity projected out for seven decades. I wouldn't trust He-Man and his Masters of the Universe let alone these Wall Street Captains of Cocaine to take care of that much money.

As for those saying that Reagan, Clinton. et. al, essentially those who got us on this path to destruction will be reviled as Americans. I disagree. America is a great country and one that does everything big. Self-delusion is among one of those. The perpetrators of this system had one thing in common: charm. There's an old saying in my Grandmother's native Calabria about how a smile and a wink will get you far. Well, here it has.

I absolutely agree with you that we need reform, or else we'll be left with just that. An ironic wink and a smile for all of our troubles.

Incidentally, what Mr. Wong is talking about, aligning private interests with the public good is recognized as being part of textbook economics. Even Adam Smith noted that in some cases, government would be necessary to smooth out externalities --the consequences that private interests place on others-- in the markets.

Why we ignore this when it comes to the high altar of American capitalism can be summed up rather simply:

Blind faith.

Glen Raphael on May 23, 2010 3:09 PM:

But when you include the idea that there was a *market price* in the story, Magnetar's wanting "risky" bundles and Goldman selling "shitty" deals stops seeming in any way nefarious. We simply have no evidence that the price didn't reflect the value.

It's not just a matter of price, it's a matter of openness about what's in the deals and motivation behind them.

Textbook definitions really don't matter. If what we currently have isn't true capitalism, then it is pointless to compare anything in the real world to capitalism, since we don't exist in that context anyway. Our society is as close to capitalism as exists. True socialism doesn't exist either, yet we have examples of socialist societies... most of them failed or failing. I'd easily argue that making our current society MORE socialist does not seem to improve anything. Nobody can find me a better example. It is hard to argue that any society is more sucessful than ours. Certainly they have some good qualities, but many of those qualities are the result of their previous forms of government... i.e. the architectural wonders of Europe are often the result of their narcissistic rulers rather than some attempt at improving the common good. Even the things that "work" are proving to be more costly than their socialist societies can support, so they embrace greater capitalism in an attempt to pay for them.

Midnight Rambler wrote:

What Magnetar did was to deliberately assemble packages that they knew would fail, and then bet that they would fail.

If you think Magnetar *knew* the packages would fail, how did they know that? What info did they have that nobody else had? Consider for an instant - just for the sake of argument - the possibility that Magnetar *didn't* know the packages would fail. If the packages succeeded, Magnetar had gotten a great price on them and would make a nice ROI. But there's risk involved, so they also constructed a portfolio of insurance bets that would offset the risk to some degree.

Magentar claims they were net-positive on these obligations and nobody else is in a position to contradict them on this account - to do so you'd have to know the amounts and prices - how much the packages cost, what their expected return was, how much the insurance cost and what its expected return was. What they were doing seems perfectly consistent with bog-standard hedging - getting some alpha by exploiting a mispricing.

In short, Magnetar's "sin" isn't that they built packages that they "knew would fail", it's that Magnetar probably *didn't care* all that much whether the packages failed - they made money either way.

It's not just a matter of price, it's a matter of openness about what's in the deals and motivation behind them.

DanielinMemphis wrote: "It is hard to argue that any society is more sucessful than ours."
__________________

Actually, it's incredibly easy to make that argument, since the US scores nowhere near #1 on the UN HDI (human development index) every year. It is nowhere near #1 in life expectancy, infant mortality, etc. Its crime rate is high, its incarceration rate is high, etc.

The logic behind your argument looks like this:

1) The US is less socialist than other G8 countries
2) All other countries suck!
3) Therefore, socialism is bad.

The problem is step #2: your assumption that every other country is "failing" because it's more socialist than the US. In fact, the US is not doing well right now, and many other countries are outperforming it in many indexes.

I'm no defender of the Wall St. titans or the way that they do their business...and at the same time, the analysis as presented seems a bit naive and simplistic as well.

It was a banking act passed during the Clinton administration, for example, that ended the distinction between investment banking and commercial banking (forgive me for being too lazy to research its name).

It was demagogery from various left-wing politicians that forced mortgage companies to dilute their underwriting standards. It actually became illegal for them to lend only to people who actually had prospects to repay.

Derivatives have been around for about 150 years (think Chicago Board of Trade) and serve an essential and invaluable role in everyday commerce. They are far too valuable and useful to outlaw (derivatives don't cause financial crashes, people do).

Securitizing mortgages, until 2005, was a real boon to many people.

It was the government that created an oligopoly for ratings agencies, which then failed in their diligence (and are escaping unscathed, it appears).

Certainly it makes good sense to segregate a financial firm's trading for its own account from the rest of its operations.

A hugely-important element is the interlocking financial interests of elected representatives, government regulators, and industry insiders, who collectively shuffle around between the different roles, while unfortunately sharing a myopic and self-centered viewpoint that totally ignores basic economics and the interest of the public good.

Roger,

As a staunch defender of all good things Chicago, I hope you will learn and promote the tremendous value provided to society by "derivatives," especially as they have been an engine of so much growth and so many good things since the Chicago Board of Trade was established in 1848.

Both manufacturers and suppliers use futures contracts routinely to lock in future prices so that they can plan effectively. Imagine a farmer, for example, who needs working capital. She can lock in a price for her harvest months in advance and use that knowledge to obtain the financing she needs to operate. Imagine a cereal company gearing up for the roll out of a new product, using futures contracts to lock in the price, and availability, of supplies with enough lead time to plan their promotions accordingly.

The futures market at the Chicago Board of Trade and the Chicago Mercantile Exchange provide tremendously valuable, and perhaps even essential, services throughout the length and breadth of this country and beyond.

"Derivatives" were not and never have been the problem....defaulting on a derivatives contract can be a problem, just like failing to honor the terms of any contract can be a problem.

If you are peeved at O'Reilly for saying something mean about the Sun Times, you should be really angry at people who through ignorance or scapegoating threaten the viability of Chicago's economy.
Just like in a

Most of the people working for the investment banks and banks do not think about the consequences for the entire economy for the products they originate and trade, but only focus upon how well they will be paid. Very few picture a credit crisis and none think real estate prices will fall, except when the prices have already fallen. Nearly all think themselves good, very few of the spectacularly rich and successful actually think they are just very lucky.

The way these deals were structured by Magnetar (and others) for the banks is that when a small piece of the deal went down, the whole thing would go down, in a cascade. What that means is that if 10 million of a 1000 million (one billion) bond issue is very likely to go down, all 1000 million goes down.

At the top of the market, the credit default swaps were actually marketed as greatly underpriced insurance polices. Insuring all 1000 million against default cost less than 20 million. Magnetar et al helped structure and bought the 10 million bad piece, paid the 20 million to insure the whole 1000 million (even though their insurable interest was only the 10 million they owned) and then received 1000 million from the insurer when the bonds went bad. In some cases, the bonds went bad less than a year after they were created so they'd have 1000 million on a 30 million investment in less than a year.

Phenomenal returns in our markets from managing money, not from producing goods and services, do not indicate a healthy economy, but a poorly regulated economy. If you double your money in a year, if you make 10X on your money in five years, you're doing extremely well. But if you make 33X your investment in less than a year, without making anything, or providing services to others, you have achieved your returns from a mismanaged, poorly regulated marketplace.

The top ten hedge fund managers have earned over $2 billion each for several years running. Most view their success as a product of their hard work and a willingness to go against the crowd when they invest. Few accept that what they've done is found niches that are under regulated and that their incomes have been under taxed.

Blame the CRA/Fannie/Freddie is the lie that refuses to die.

It's depressing that a mythology that has been debunked over and over will still be offered with a level of certainty usually reserved for religious dogma.

If the posters here who keep pushing this B.S. are REALLY SURE it's true, financial expert and Bailout Nation author Barry Ritholtz will give you $100,000 cash money if you can prove it:

"Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.

Specifically, I have requested some data or evidence that DISPROVED the following facts:

-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

-The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders

-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie

-In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.

-After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages — in order to maintain market share and compete with Wall Street for profits.

-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

...

The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.

Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy."

(http://www.ritholtz.com/blog/2010/05/rewriting-the-causes-of-the-credit-crisis/)

So please - spare this and other blogs your nonsense unless you can back it up. I'll belive you when you show me that $100K.

I would like to quote one of the great minds of Hollywood,

"You can't cheat an honest man."

It is a fact.

During the depression, my father found work at a traveling carnival. He ran the "Ring the Bell" attraction, a popular scam where a "rube" smacks a lever with a mallet in an attempt to drive a weight up a brass bar with a bell at the top. The secret of the device was that one of the tension wires was left loose. The result being that no one could actually ring the bell *EXCEPT* when Dad leaned back against the wire providing the needed tension.

Typically, Dad would lean back on the wire when a petite young girl accompanied by a burly farmhand would step up to the mallet, allowing her to easily ring the bell. Then when her heavily muscled boy friend stepped up, Dad would stand away from the wire. The humiliated boyfriend would not admit that he couldn't ring the bell and Dad could often get every penny in the his pockets.

Dad had some feelings of guilt, yet he also felt disdain for the flaws in the people who would allow themselves to be so easily and obviously manipulated. He also saw the many smart people who walked on by, immune to the lure of prizes or pride, knowing a scam when they saw one.

Today the average American is dumber than a sack of wet bricks and can easily be duped into doing stupid things like taking out mortgages that they cannot pay or investing in offerings they cannot understand or spending their paycheck trying to ring the bell.

So what is the answer? Is it possible to "reform" the markets so that brainless people can safely invest? I say no!

Bearing in mind that I have no objection to making needed reforms, but we all must know that we are just like dutch boys sticking their thumbs in the hole in the dike. You must assume that another hole will appear just beyond the reach of your remaining thumb.

We have become a nation of "victims" led by greed and ignorance to do insanely stupid things and cry about the awful people who we paid so generously to victimize us. Am I the only one who believes that until we address this epidemic of stupidity and moral degeneration "reform" can only result in the invention of new scams?

I heartily agree with the Siskell philosophy of investing. No evil in the marketplace can harm you as long as you stick to it!

I am in agreement with you on all points except one: I was an employee of Lehman Brothers--not one of the high-paid ones--but I did ride the elevator with Mr. Fuld on one occasion. Other colleagues had similar experiences, so there was a sense that he at least tried to "mingle with the commonfolk" from time to time. Now whether or not he used hand sanitizer and changed into a fresh suit immediately after those elevator rides may never be known...

I remember watching "The Smartest Guys in the Room" in the River Oaks Theater in Houston.

http://www.landmarktheatres.com/Market/Houston/RiverOaksTheatre.htm

That crowd was a wonderfullly mixed bag of the landed, traditional, eccentric and subversive denizens of Houston, and there was audible weeping at several points during the film throughout the theater. Enron's fall touched all of us in the city, and we all mourned or raged, or both.
I remembered that night when I read this review. As the child of two economists from a foreign country, my parents taught me enough at our dinner table to worry about financial deregulation...it's always seemed akin to having the fox watch the henhouse. I think there will be more tears over this film; whether of grief or rage, I cannot tell.

I believe it is against my better judgment to make this post, but your recent review on Inside Job compels me to not leave well enough alone. With all due respect, it would appear neither yourself, nor your late colleague and friend, knew much that might allude to sanity or basic understanding of investment markets. In this you would not be alone, neither would you be the only one to write articles espousing such errant opinions. But, I have taken to no longer studying the so-called experts, and thus was perhaps blindsided by this article by a self-proclaimed non-expert (at least you started out honest) who, nevertheless, and perhaps it is the nature of hte beast, concludes with "expert" advice to pass on.

Briefly then:

Concerning your colleague's advice: I can only derive perhaps what he meant was to pick something historically safe and conservative (like IBM) and dont try to make the big killing. Otherwise, of course he as wrong - many can and do beat the market (isnt that what hte documentary is about?), and do it all the time. 2008 etc was brought about by those who quite decidely "beat the market". Many more in fact derive comfortable incomes from investments. Many lose everything. So not sure what his point was. And of course, the supposedly conservative investments provide very low, albeit, secure dividends. You would have to invest all your money indeed (and then some) to derive a worthwhile annual income from those.

Rational people invest in markets to make money, extract profit or return on investment (actually, it is more than that - it is to beat the average or benchmark yield, but something suggests this is already causing eyes to glaze). Not to feel good; there are plenty of charities for using money to feel good about oneself. For example, a fool invests in the "green economy" because he wants a better world. A fool or someone with money to lose. (There is a question raised at this point concerning "greed" which i would be happy to address but only if it is raised.)

A wise, rational, non-Bill Gates type invests, to use the same analogy, in green markets to make a profit, and if profit doesnt come then he moves his investment. Unless, again, he has money to lose. Of course, many investors do not act rationally. Many investors also lose, a lot.

There are other things, but I am getting this out of my system it seems so will wind it down. The conclusion you derive from your colleague's "wisdom" - that had you followed it you would have been loaded - is due to shear blind luck (akin to: my friend suggested I take morning jogs.. one morning when jogging a plane crashed into and destroyed my house.. therefore, my friend is very wise about how to avoid plane crashes). Mind you, do not think that luck is not a major component of market play, but I wont go there today.

I would be willing to bet though that the tasty morsel of news concerning hookers on retainer arrived at approx the 50-60min mark of the doc (am I right?). I have a feel for the type of doc this seems to be shaping up to be. Simply because by then people are either too confused by the already significant dumbing down of the relevant issues and need a jolt to stay awake or that titillation is an addiction in mainstream culture and, at the 50-60 min mark, it is about due. Anyway, that competitive, aggressive guys with access to large sums of money should partake in screwing beautiful, raunchy women is just all so, like, hard to believe, dude. Guys screwing hookers?? God, what a mess the country is in etc etc.

Finally, the call for market reform is heroic but again underlines the lack of basic, philosophical concepts of what hte market represents and how it has done what it has done for a long time (lack of philosophy indicates lack of thought). The nature of the beast makes "fixing" - as though it were a car's exhaust system - or "reforming" - as though it were a derelict offspring and heir (basically good but either misguided by youthful exuberance or in with the wrong crowd - you know, the typical excuses made by parents that have an asshole for a child) quite problematic, but again, too much to go to today perhaps.

Anywho. Methinks sir you know next to nothing about investment markets (nor what guys with access to tons of cash may be likely to do to recreate) and that yet you were impressed by this doc. Which suggests I shall gladly pass. Or view forewarned, thanks to your review.

Thank you for reading and posting.

Best,
Scott

Ebert: As I said in the first sentence, I don't understand this stuff. I followed Siskel's advice and bought Apple at $17. It was good advice.

I just read your review of "Inside Job". I'm a free market advocate, so I believe in little regulation. In the review you discuss the moves that banks made against their investors. They are obviously bad companies to do business with, but I don't think such practices should be regulated. The customer chose to buy the investment. No one forced them to risk their money in the investment.

I bet you have been sold a lemon before. The company you bought it from may have helped you out, or they may have left you out in the cold. I don't think we need to regulate lemons though.

Ebert: Well, that's what we get with deregulation. Many people naively believe big Wall Street trading firms wouldn't deliberately defraud them.

Ebert: As I said in the first sentence, I don't understand this stuff. I followed Siskel's advice and bought Apple at $17. It was good advice.

Actually, your first sentence states you dont understand derivatives. My point is that your understanding of markets on a broader, more fundamental scale is, at best - based on how you think they "ought to" work and how they "do work" (and what constitutes coherent "advice") - common and misled. And since you have access to public minds, misleading.

Ebert: Please explain to us.

COncerning "reform" - I would be quite interested to learn when these supposed "previous eras of transparency" occurred.

You see, the common misconception shared by yourself and many others (including those with expensive educations/indoctrinations on/into the subject/club) is that the market exists as a viable mechanism that simply needs a few tweaks and adjustments or reforms to get it working the way it "ought to". Well, Roger, there are many who would suggest the markets run beautifully. That they do not run beautifully for most of society - well, that isnt why markets exist.

The last time something similar happened a significant degree of criticism and loss of confidence was directed against the capitalist power structure - the capitalist state. Severe scrambling to protect the status quo combined with fortuitous developments to stave off revolt against capitalist power. Prosperity conquers all, it appears. Of course, I am referring to the collapse and aftermath of 1929, through WW2 and into the golden era of American capitalism (your heyday - approx 1945-1965/1970ish).

Now, the loss of confidence has returned, only now the global political arena is significantly different. Before, the US was a giant simply because it remained standing. This time everyone else is standing quite well (the current currency war between China and US reflects this new reality. The American laisse faire capitalist model (also known as the American corporate welfare capitalist model) is being challenged, and investors are commenting via lack of investing. THis will likely lead to increases in right-wing isolationism and unilateralism in the US).

Also, concerning your review on the socio-political future of China (Long Train Home(?) its no longer on your site(?)) and your conclusion that denims will lead the country to chaos. You see, that is a very American perspective, from within a very specific period. Your world (your generation) was really the first generation (maybe the 2nd because your folks likely experienced it first - post-war) to identify itself as wage-earners - working for a wage, with no other reason than to spend it. COnsumerism, though it existed certainly prior to post-war generations, really entrenched itself in the masses (middle class) during the initial postwar generations, particularly the boomers. (Via violence and corruption the US imported this to Japan, colluding with yakuza and ideological allies to stamp out socialist and other alternatives to the capitalist system that were arising within campuses.)

So it is quite an American boomer conception that goods buy all. Now, as stated, this consumerism is certainly exportable. I would argue just not as freely, nor as inevitable, nor as routine as you seem to think (and when I refer to "you" - what I really am referring to is your opinion as representative of what is commonly held. Clearly, your politics seem mostly if not completely informed by the specificity of your ideological indoctrination.. I bet you buy into the myth that it was a Russian's desire for American consumerism that brought down the Iron Curtain?). So, make no mistake, consumerism is an ideological phenomenon (as consumerism should not be confused with removal of poverty.. your review seemed not to be aware of such distinctions), one that is American at root.

Best,
Scott

Ebert: "The Last Train Home" is still on the site. I agree consumerism is the most powerful global economic force at work today. Rushing for a plane, but appreciate your comment.

Ebert: Please explain to us.

In the 1970s approx there occurred a sea-change of sorts upon the popular, common perception of investment markets. To that time they were things that provided very little ROI and one needed vast sums invested to withdraw any substantial dividend. Things changed. And the new market promised very different things: specifically, that very real money may be made playing the markets, and that vast sums were not necessary. More of the middle class began to view the market as a source of income, even a source of potential wealth.

WEll, big things had to change within the way things were done with money. A certain creativity was necessary. Thus sets the trajectory towards what has been the norm as of late (if we go back to the S&L scandals, the dotcom bubble, the housing bubble, the derivatives scams) - high risk, creative ventures designed to attract those who have been indoctrinated into viewing the market as a method to make significant and quick money (and here I am not merely referring to the CEOs). The point is that things were not always thus.

I am sure an argument could be well made that broader access to potential market wealth and income was created by administrations (and the ruling classes they represent, without exception (white or black), though it would be unfair to suggest that the middle classes were not willing participants) as a surrogate for democratic process. THe change I describe above in market climate began to take place at the same time labour took severe hits (in the form of anti-unionism and business deregulation, oversea-ing and offshoring and the decline of the real average individual purchasing power) while business classes took extreme windfalls (when the average CEO salary as a factor of the average employee's salary went from approx 5-10 to 200). Therefore, for certain parts of the middle class, investment market accessibility and wealth opportunity maintained the illusion of the American Dream. Market play became a chief means of providing the illusion that America remained the land of opportunity, and through a specific ideological identity, since the markets also contain the whiffs (and myths) of individualism, the triumph of laisse faire capitalism, progressive society, accumulation, consumerism etc. All very American ideals.

To have something stable and reliable enough (relatively) to provide a source of income will create a market of low risk and therefore of low dividends. Otherwise, a market that is more dynamic will be more attractive and accessible but will carry higher risks (and since all capital is finance one really cannot avoid completely be affected by changes or crashes, even if holding staid stock).

I realize the unraveling of derivatives can appear more sexy for those who are inclined. But there are broader and more relevant questions that are not being asked, and need to be. First is the perception of what markets are, which I have addressed in this and previous posts.

Your use of hte word "advice" and implying of "good advice" is quite common, as was the spirit of your colleague's position in giving it. Markets are terribly complicated. They are also impossible to predict. One can certainly guess, and make an educated guess, but there always is the element of the unknown,the unpredictable. And so many people that do not go through brokers (though even the brokers themselves employ this method to some degree) go by non-rational methods of choosing investment targets. Similar to filling out a form at the track (the horse betting analogy works better than the casino analogy for investment markets, for the most part. Hoewver, there is a point where the casino analogy holds true, which is near the end of a bubble (bubbles are also inherent within the current market culture)).

So, in your scenario (which I keep repeating is common, not peculiar to you or your colleague) "good advice" is that which leads to good outcomes. I suggest that luck was more responsible. Advice is not necessarily a reasonably informed opinion or insight. It just so happened that the companies you immediately identified as interesting to you were about to do consistently well, something that was not a guarantee at the time. If your interests happened to lay in eight-track cassettes and, i dunno, the World Football League then following your friend's advice and putting all your money into those things would have been disastrous for you. Same advice, different results.

It is also important to realize that the market is a competitive system and will be dominated not by democratic ideals, but by those at and near the top. To return to the casino analogy - markets are not casinos because one is placing bets. Horse racing takes bets but there, if one has done sufficient research, has inside information, and has luck and significant volume of bets made, then he can reasonably do well. However, in a casino the house wins, if not always then eventually. It's set up that way, this we all know. So the market becomes a casino when those at the top decide they want to win. To do so they, like a casino, will skew the rules and terms of play in their favour. This process ensures enormous dividends for those at the top (as we have seen). And, since capitalism is a zero-sum game, where enormous wins are also exist enormous losses. This is not to suggest there are puppet-masters. (And for those that do not understand how markets work then yes, the market will look like a ponzi scheme (after they lose or are locked out)).

The big problem facing America now, the way I see it, is the loss of faith in the surrogate that the investment markets became for many middle class Americans who otherwise would not have had access to the American Dream. With its collapse, households now face the grim reality that has been in place and building for decades: middle class households work longer (if they are working at all) for lower purchasing power than they had in the 1970s; there is no promise that the future will be better (that society is progressive); the American Dream must mean more than consumerism (hence, an increase in provincial values and identities). It suggests potentially a return similar to 1930s resentment and loss of faith, though so much of the alternative or left/socialist position has been gutted out since the 1950s and 60s.

Most people want to know how the market works. My overarching point is to suggest it is more important to understand why they work.

But perhaps this is enough for now.

"Ebert: Well, that's what we get with deregulation. Many people naively believe big Wall Street trading firms wouldn't deliberately defraud them. "

I would have thought that after the dotcom bubble and Enron that people could learn that Wall Street can be a dangerous game when you don't know the ropes.

Yes Roger, one day we will be hunched over a rickety bare table in a dirty old coffeeshop, sorting out who is to blame in conspiratorial whispers. We will discover what Pogo did, that it is us.

Your president just returned from a conference with the G20, designed to prevent "currency wars". What the president requested was shot down by Germany and China, adn the conference was generally considered a failure. Similar to other conferences in the past couple of years. What is likely to continue is the drift into protectionism. The US is dealing from an increasingly weakened position, one that has been declining for the past 40 years, and which was underlined in the desperate unilateralism of the last administration and the unchanged course of this one. In fact, in retrospect, I would suggest it perhaps likely that the unilateralism of bush 2 was really a means to hide the ambiguity of its "allies". It is estimated that the US annual interest on its debt will reach $1 trillion by 2030. That is obviously unsustainable. Globally, its ally in the East (Japan) will continue to slide in relevance (by midcentury Japans population is expected to decline to approx 50million, roughly the number it had at the turn of the 20th century.) The only other ally in the region of any substance is Pakistan (this is why the US must cling to Israel, and, realizing the futility in that, construct a puppet-state themselves. However, the US has placed itself in a good spot strategically. It has its thumb on oil production. Oil prices affect everything, including protecting against the worst of all possible things for a capitalist society - deflation. The trick is to use it to your advantage, both locally and globally). Of course, such terms as "allies" may seem so cold-war-ish, and outdated. However, in an increasingly protectionist world, allies gain importance. Trade agreements will gain huge importance. Besides its military, and much more significantly, the asset of the US on the world stage was its financial sector - its ability to absorb global investment, and the reach of its currency, essentially the world currency. There really was no market to rival it despite attempts like the Euro (and for a while Japan teased the stage with proposing, not seriously, an Asian currency). Now, the financial infrastructure in the US is shredded, propped up solely by an increasingly befuddled and bankrupt government. HOwever, the rest of the world is fairing not much better (although Canada is a clear exception - doing better than the US and Europe). But the loss of faith in specifically the US' ability to continue its role of the past 60 years (in different forms) will encourage other leading nations to seek solutions with or without the US approval. This leaves the US with the weight of its military, which has proven essentially useless without a draft, and no administration could afford that politically.

I do not believe that de-regulation was the problem. If anything it was the fact that government agencies were involved in the first place. Big business should not be involved with our laws and decisions of them.

I find it quite unbelieveable that this is tolerated.
In any other sector there would be screams of "conflct of interests". And all those voices would be spot on the money.

It's not just the financial regulation since the Reagan years has become more lax, it's that event he lax regulation is being ignored by our "regulators." Wall Street has captured the regulators and the politicians, and like Andrea said in the previous comment, it's tolerated. Well, until the American public begins to protest in earnest.

Good post.

Jim

To me it's quite simple. Letting businesses run anything is asking for trouble. All a business ever cares about is money and the bottom line. Just like companies try to squeeze everything they can to make even more profit, the same happens to banks.

The Government however cares about the people. Not because they care, but because their interest is in keeping the country going. That is a huge, subtle difference. It is this difference that kept the country positive before crap policy change.

I think the problem was, and always will be the people at the top of these major banks thinking they are untouchable by the law, regulators or anyone else.

Everyone needs to be accountable to someone, and bonuses need to be relative to company performance, and not an expected part of salery, much like they are for the rest of the world outside of the banking community.

A similar problem happened in England with all the ministers essentially self regulating their expenses, which blew up the moment the public found out about it. I am fairly sure these high executives in banks also have expense claims larger than my annual salary, not to mention their salary and bonus on top of that!