June 23, 2011
I always enjoy reading Ezra Klein’s blog. He’s an excellent writer and he does his homework. However, he really missed the story in his review of Inside Job (even though I do appreciate the favorable mention).
Ezra criticizes the movie for making the story one of corrupt economists blessing the evil doers of Wall Street:
“What’s remarkable about the financial crisis isn’t just how many people got it wrong, but how many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms.”
This is the right point, but I think Ezra takes it in the wrong direction. Certainly all of these people were not on the take in the same way as some of the film’s heroes (i.e. former Federal Reserve Board Governor Frederick Mishkin who got paid six figures to write a report praising Iceland to the sky in 2006). However, it does not follow that they had incentive to “get it right.”
Getting it right meant that you had to say that the honchos were wrong. You had to say that Martin Feldstein, Gregory Mankiw, Larry Summers, Alan Blinder, Ben Bernanke, and the Maestro, Alan Greenspan, were missing the largest asset bubble in the history of the world right in front of their eyes.
This would really put you on the firing line if you were an economist at the Fed, the IMF, or even an academic economist hoping to advance in the field. After all, you could be wrong, in which case you might as well spend the rest of your working career wearing a tin foil hat.
On the other hand, what is the cost of going along? It turns out that economists are a remarkably forgiving lot – not in respect to workers in workers in the United States or retirees in Greece – but certainly when it comes to each other. The mantra “who could have known?” has provided a pretty much blanket amnesty. Next to no one got fired and very few people even missed a scheduled promotion for missing the housing bubble; the collapse of which may wreck the economy for a decade. In fact, even Daniel Mudd and Richard Fuld, the men who bankrupted Fannie Mae and Lehman respectively, have both found their way back into very high-paying jobs in finance.
In short, there is a serious problem here of asymmetric risk. There is no doubt that saying there was a bubble posed serious dangers to the careers of those who stepped outside of the consensus established by the top thinkers in the profession. However, just going along with the mainstream view carried no risk whatsoever. There is no reason to believe that anything about this story has changed in the years since the crisis.
Perhaps Inside Job can be blamed for not fully exploring the subtleties of this process, but it was a movie, not a book, and there is a need to be entertaining as well as informative. So, I can agree that the movie did not fully explain the dynamics that allowed for such a dangerous bubble to grow right under the nose of so many intelligent people, but I think it still got the essentials of the story right.
Like Ezra, I qualify as a nerd. But the movie was not intended to provide the full story to the discerning nerd. It was intended to give the essentials to the masses, and on this score I give it high marks.
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