Sunday, December 12, 2010

The causes of the financial crisis and the documentary "The Inside Job"

A good start to understanding the causes of the financial crises:

Katie Couric Interview of "The Inside Job" director Charles Ferguson 11-9-2010
(36 minute interview)

Charles Ferguson has the credentials to be taken seriously.  According to Steve Dollar (10-1-2010 WSJ article - see link below),

 "[Charles Ferguson] The 55-year-old software millionaire-turned-filmmaker, whose 2007 Iraq War documentary, "No End in Sight," earned an Oscar nomination, is no gimmick-prone Michael Moore. He's a former policy wonk with a doctorate in political science from M.I.T."

Even if you saw the movie, this interview provides perspective and answers a few nagging questions.

If you didn't see the movie (which I recommend) watching this interview might allow you to fake expertise at cocktail parties. No one is spared. Academic economists take a big hit too.

 A partial list of causes of the financial crises stressed by Ferguson include:

1. regulators' conflict of interest (high incomes once return to private sector)
2. economists' conflict of interest (large consulting fees and paid-for-papers - which go undisclosed)
3. politicians' conflict of interest (hard to write tough regulations for your sponsors)
4. poorly designed compensation packages - that reward earnings regardless of risk
5. board of trustees' lack of independence and motivation to protect shareholders - friends of CEO rubber stamp compensation packages. 
6. investment banks are NOT required to consider clients' interests -  an investment bank can sell financial instruments that they think will fall in value to clients, and then bet against those financial instruments without disclosing anything to their clients.
7. Congress promoting proliferation of mortgages ("homeownership for all" may sound good  as a political slogan but there are consequences).
8. adoption of free market philosophy without full consideration of implications

Some other places to look:

(WSJ) No Straight Answers in Sight by Steve Dollar (10-1-2010)

(WSJ) Hiding, Harboring, Hoarding at Harvard by David Weidner (9-23-2010)

In today's New York Times

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