The Global Financial Crisis Exposed


All is not as it seems in the world of high finance

Money, power, bias – and truth. The Global Financial Crisis (now simply designated ‘the GFC’) brought all of these priorities, and the conflicts they cause, into stark view. A new movie “The Inside Job” successfully highlights the interplay of vested interests, hidden compensation and regulatory policy stupidity that suggests not only that the eventual crisis was inevitable – but that there is very little reason to believe that it will not happen again.

The financial jargon is clearly explained, and the key participants in what turned out to be globally far reaching decisions are given a chance to put forward their version of events. All-in-all, not many of them do a very good job of doing so (it’s hard not to laugh at the way film maker Charles Ferguson edits former economic giants Frederick Mishkin or Glenn Hubbard). After all, how do you justify earning hundreds of millions of dollars as remuneration of a business that virtually collapsed under your stewardship (and then being allowed to cash in your shares without having to pay $50 million of taxes on that profit)? Here’s a quick look at the film trailer:


But this is not a movie review. If you have an interest in the watershed events that will most likely shape the financial world for the next 10 years then it’d be worthwhile adding the movie to your ‘must see’ list. If you don’t have a global interest then perhaps you may be more interested in how all of this reflects on we here in Australia?

It actually impacts massively on our corner of the world. Here are a few examples:

  • After the GFC, China used its financial strength to implement a massive spending on infrastructure and to stimulate investment. Australia’s commodity businesses directly received billions of new dollars from this Chinese government policy.
    • That money generated extra income that helped our federal government to provide support to the major banks that allowed them to continue to lend aggressively for residential property purchases.
    • That money helped the federal government offer huge incentives to (theoretically) first-home buyers, which in turn worked to place a ‘floor’ on the property price generally and stop a rout in property prices.
  • Some Australian councils and statutory authorities held the AAA rated investments mentioned in the film, and they suffered losses from that decision.
    • As a by-the-by, many superannuation funds held those high earning, high rated dud investments – although you’d have to look at the fine print to find them.
    • As another by-the-by, this outcome highlights the need to treat even the most highly-rated investment commentary as nothing more than an opinion.
  • The US Government dropped interest rates dramatically in an attempt to stop their economy spiralling into a massive and unstoppable depressionary cycle. For various reasons, Australia’s Reserve Bank followed suit – resulting in a period of historically low mortgage rates, thereby benefitting all mortgage payers.
    • Those low interest rates forced US speculative money (and there are hundreds of billions of dollars of that stuff) overseas, with Australia benefitting both directly and indirectly from that.
    • Those same conditions are contributing to inflation and currency problems for countries all over the world. The outcome of this will most likely be far greater than the impact of falling sharemarkets.
  • The supply/demand equation was suddenly cast into disarray. This caused the prices of many imported items to fall dramatically. At the same time, Australia’s currency (after initially dropping like a rock), regained its strength, making imported goods even cheaper. Not that life is necessarily any better with a huge 3D LCD, twin-overhead-cam, fox-tailed television – but it’s nice to know that if you want one, it won’t stop you feeding the children for a year.
  • The most obvious impact was on the sharemarket, and any listed investments. The Australian sharemarket followed the global markets into a fall of a precipice. And we still have around 50% to go to get back to where things were in November 2007 (the previous high point).
  • Superannuation returns of a couple of percent over 10 years were suddenly commonplace. This will impact how people invest and how they view their super for a lot of years to come.

The film paints a coherent picture of what goes wrong when regulatory oversight is reduced, and when ‘free market’ forces are all let loose. However, like a Mike Moore documentary, it sometimes allows the overall theme to get in the way of an objective analysis. Here are a few examples of the films’ own bias (if you are going to see the movie, it may be best to read the rest of this post later, and see if you agree with the comments):

  • Executive and sales compensation is strongly targetted as being responsible for the GFC. However, not all bonuses are paid incorrectly, nor is every person who receives one a crook or a spin-doctor. The time following the GFC would have been particularly hard for anyone trying to work in these organisations. It is quite likely that a reasonable percentage of bonuses earned under these conditions were validly paid.
  • Much is made of ‘predatory lending’. Nothing is raised about the fun ordinary people had buying properties and watching their values lift by 50%, 100%, 150% and happily banking the profits. There was no mention of people day-trading properties to cash in on the boom in prices. Nothing was raised about the myths and fallacies surrounding residential property investment – aside from one single comment by one of the great regulators, along the lines of “there has never been a nationwide negative return in property prices” (poorly quoted most likely – but one of the more ridiculous utterances in history. The series that measured house prices only tracked records for 30 years or so – hardly a robust data set to base such a broad statement on?!). In other words, the politicians and institutions are painted as the key drivers of the GFC. Whether that is true or not is not as relevant as the fact that their activities benefitted from ‘solid truths’ believed by the average person.
  • Those myths and ‘truths’ are held by the average Australian investor, and the impression that residential property is virtually infallible was simply reinforced by the impacts mentioned above. This continues to be the case, even when it is realised that Australia is practically alone in having this outcome, and that the same rates of price growth that were considered ‘unsustainable’, ‘ridiculous’, ‘a bubble’ in Ireland, the UK and the US have occurred here in Australia. It is somewhat scary that in the face of the global property outcomes, senior officials of two of Australia’s major banks have been travelling the world, explaining why ‘it’s different this time’. Just as scary is the almost zealous governmental effort that went into convincing first home buyers to make purchases at times of historically high prices and historically low interest rates. Let’s just hope that your blogger’s assessment of the likely outcomes of those decisions is too conservative.

There is only so much that a film maker can squeeze into two hours, while still holding the audience’s attention. It will be interesting to see if there are more movies and documentaries generated by the interest this movie raises – as there is a much larger human version of events to be told – of the impacts on families from millions of home evictions, of the societal memories formed when over 27% of mortgage holders in the United States owe more than their homes are worth, of the average US worker losing everything, while the people at the top of the financial and government administration profit even further, of worker pensions being cut while bonuses for executives are lifted.

If nothing else, watching this movie will help everyone to appreciate that Australia (so far) has truly proven to be, the lucky country.


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