20130829: Documentary Review--The Flaw

1. The Flaw: introduction


1. British live action feature length film, 2011, NR, 78 minutes, documentary detailing the major recession of 2007 to 2009 in America and in Western Europe, including the housing bubble in the States.
2. IMDB: 7.2/10.0 from 224 users; from the summary, 'The film argues that the roots of the crisis lie in the changing relationship between the rich and the rest in American society.'
3. Rotten Tomatoes: 80% on the meter, but 'still no consensus'; 65% liked it from 151 audience ratings.
4. Directed by David Sington.
5. Guest experts, and their one sentence theories:
1. Andrew Luan, former (sub-prime) mortgage bond trader on Wall Street, now a Wall Street tour guide (fear; March 2008 to September 2008, multiple failures: Freddy and Fannie, Lehman Brothers, Iceland, and so on)
2. Alan Greenspan, former chairman of the Federal Reserve, 1987-2006 ( a flaw in his model of how economics works)
3. Robert Shiller, Professor of Economics, Yale University (world historical events)
4. Louis Hyman, Economic Historian, Harvard University (it's about wages)
5. George Cooper, Fund Manager, Blue Crest Capital (it's a debt crisis, and very much a crisis of economic theory)
6. Robert Frank, Professor of Economics, Cornell University (income distribution problem)
7. Nell Minow, corporate watchdog, The Corporate Library (all the people we've trusted have turned out to be untrustworthy)
8. Joseph Stiglitz, Nobel prize winner in Economics, Columbia University (this is a total failure of markets)
9. Daniel Ariely, Professor of Psychology and Behavioral Economics, Duke University (people make mistakes of many sorts)
10. Ed Andrews, Economics Correspondent, New York Times, still a delinquent borrower (got burned in the housing bubble, as did so many others)
6. At the start of the film, there is no clear POV (point of view).  Instead, the problem is approached in the style of showing each of ten blind men a different piece of an elephant.  It takes some work to get the data returned by the blind men into something overarching and coherent, such as a single 3-d model of the elephant which explains all reportage.
7. Let's see whether the coherence and generalisation comes into focus.


2. History,  phase 1


1. 1970s: the 'efficient markets hypothesis' took hold as doctrine--if the price of something is too low, the market will bid it up; if the price is too high, the market will bid the price down.  Individuals might make bad bids, but in aggregate, the 'wisdom of the crowd' will be correct.  Most of the time.  So...the bigger the market, the more foolhardy it would be to question a market price; social intelligence will get it corrected at all times.
2. So, supposedly, this applies to assets of all types, and one cannot have an asset bubble of any kind in modern markets.  How can anyone believe that?  Bubble means 'speculative market price increase that cannot be justified', full of air, and bound to burst.  Seen repeatedly through centuries of capitalism.
3. Stock market bubble in the 90s, tech bubble around 2001, mortgage bubble 2008.  How can this be?  Better question: how could it not be?
4. Reagan-Thatcher period with lessening of regulation; fall of the Soviet Union; rise of capitalism in China: these sorts of big strokes indicated that free markets were the way to go.  Shiller called this a gold-rush mentality: get on board or get left behind.  Of course, bubbles get created by this kind of thinking.
5. The response to the 2001 dot-com bubble bursting was to 'rotate out of the equity sector into the property sector' which later gave us the sub-prime mortgage debacle.  Only this time, average investors were staggeringly more poor after the bubble burst, because so many 'bet the house' on it.  Literally.  Three interviews were done with people who were deeply burned by this process.
6. The housing market turned houses (usually property to be kept and bought on debt) that we live in into assets (to be traded later, or borrowed against if the prices go up), which fed the bubble.  That sort of works until the prices start to fall; then it all collapses, rather like 1929.
7. The flaw was the perception that pricing of property or assets is a stable, self-correcting system.  So one should not fool with it when it was going well.  However, if things were going badly, the Fed would pump money into the system (lowering interest rates, or just printing money), so that prices continue to go up, and borrowing continues to increase.


3. Perceptions:


1. When was America at its most stable economically?  Everyone says the 1950s.  One income could support a family and buy a house.  According to Louis Hyman, this is no accident.  The 1950s was the beginning of a short period in American life that had the lowest income disparity in society as a whole.
2. The percentage of total income in America in the top one percent peaked at 22% in 1929, followed by the Great Depression.  Post World War II, this percentage dropped, and continued to drop, until it hit its lowest point in the 1970s, at 9%.  In the late seventies, this bottomed out, and started to climb.  It continued to climb until 2007, when it hit 22% again, and the Great Recession started.


4. More history.


1. Before the Depression, the rise of the top one percent was accompanied by a huge increase in debt for cars, refrigerators, houses, and so on.  This escalated to too much indebtedness, too many margin buys, and the like.  Debt as a percentage of GDP reached a peak at the breaking point.  So the debt percentage curve and the curve for percentage of GDP owned by the top 1 percent mirror each other.
2. There were strong parallels in the 2008 debacle.  The financial sector accounted for 40% of all corporate profits in 2003, which is grotesquely too high, and incentives to top financial officers go through the roof.  Yikes.  A Goldman-Sachs officer defended this bovine scatology.  As George Cooper put it, 'if they were that good, we would not be in this mess.'
3. Real wages rose steadily from end of World War II until 1970.  The rise of globalization and industrialization hit the American work force.  The bottom 90% of the American work force earned around 65% of GDP from 1940 to 1980.  Then this portion dropped to 50% by 2003.
4. Today, on the other end of the spectrum, 15,000 Americans, the top 0.1%, make 700 billion USD, slightly more than the GDP of Brazil.  This has a direct affect on the present problem.  As people's income rises, they tend not to buy food, washing machines, or cars, except out of petty cash.  The real object of their spending is in assets.  With so much more of the total income in the hands of a few, there was much more activity in assets, and housing had become an asset, something to invest in for future profits.  This fed the bubble.  Also, this activity drives up housing prices, so that the median level house buyers have to buy more expensive houses so that their children can go to good schools.
5. Robert Shiller put together (huge effort) a grand index of American housing prices, corrected for inflation, from 1890 to 2010.  There was a bit of a trough in the Depression, but there was only one bump, and that was a huge bubble starting around 2000.
6. 'While the top was not willing to pay the bottom reasonable wages, they were willing to lend them money'...to feed the housing bubble.
7. FHA: federal housing administration, whose racial profiling policies contributed heavily to the formation of slums in larges cities. Later, financial institutions looked at the slums and perceived them to be a way to gain money by flipping over housing, which fed the bubble, of course, more fuel for the fire. 


5. Back to current issues


1. CDO: collateralized debt obligations--banks don't want mortgages (money returns over too long a period) so they sell the mortgage to some one else; same applies to credit card debts and a few other instruments.  Finance companies buy the pieces, construct CDOs, then sell the CDOs to some greater fool at some acknowledged risk level.  (Higher risk, higher yields.)
2. Bad house loans were given high risk ratings, and came to be encouraged. (Red lights!)
3. Ed Andrews, who got caught in the bubble, explained how he got his loan in this environment, when it was clear he had no business buying anything on credit worth more than a lawn mower.  He did not have to disclose his salary or his true monthly expenses.
4. He was not alone.  Lenders were pushing loans on people who could not possibly pay them off. This meant guaranteed foreclosures.  The lenders did not care since they would sell off the loan later and do it again.  Some people were encouraged to re-finance, which helped the lenders, but also had the effect of deteriorating the equity the owners had accumulated in the real property.
5. The financial institutions make more money on these housing scams than they would in investing in manufacturing or in small business creation.  Hence the weakness in these areas and the quickening of the bubble expansion.
6. With housing prices rising and real incomes falling, people tend to re-finance to make up for the shortfall in income.  This led to a large aggregate drop in personal house equity in the bottom 90% of incomes.
7. The drop in the percent of GDP earned by the bottom 90% represented a transfer upward of 1.5 trillion USD per year during the bubble period.  This intolerable theft was done over a period of decades in stable democracies (not just the USA), where the very people who promoted the problem were elected again and again (Reagan, Bush, Clinton, Bush, Obama).  Yes, Obama, the problem is still going on.  The upward 1.5 trillion was sort of balanced by the 1.0 trillion coming down in the form of house refinancing and extreme credit card debt (which led to more refinancing).


6. Meltdown


1. The huge upward spike in housing prices before 2007 was accompanied by a steep drop over the time interval of 18 months or so.
2. This started in late 2006, apparently, with the numbers of loan payment failures started going up, and credit ratings of some of the CDOs going down.  Then the panic was on, because there was little solid to hold onto.  Banks got clobbered when bad loans got sent back to them.  Because of all the automation in the finance world, this all could collapse rather quickly.
3. Responsibility?  This seems to be lacking.  Many people identified as victims or 'cogs in the much bigger machine.'
4. The impact on the victims is huge.
5. In terms of overall viewpoint, the middle class has falling wages, and after the meltdown, has most or all of their house equity lost.  Net strong equity positions became personal disasters.  Housing failed to counter-balance the falling wages.
6. Wage inequality has allowed this updraft of money from people who need it and will spend it to people who don't need it, and perhaps won't spend it on things that will help the general economy.  The growing level of inequality results in overall consumption going down, and the economy slowing.  (Also, the much hated phenomenon of executives getting obscenely huge salaries/bonuses even when their company lost money.)
7. The failure of capitalism in the past 30 years is that the overall standard of living has gone down, which bucks the trend of the last 500 years.


7. Five stars of five.  Brilliant; the experts were all correct, and the film put it all together by the end of the show.
   

Cinematography: 8/10 The archival footage is not all that good. The modern interviews were crisp and well-done.

Sound: 8/10 Almost everyone is properly miked.  The archival footage of Greenspan versus Waxman in the House hearings was weak.

Screenplay: 10/10 Obviously had a lot of careful thought.  This is so well done that it moves well even with the large amount of detail and history being conveyed.