For movie buffs this is the season of Cannes, the iconic annual film festival on the French Riviera from where tomorrow’s hit films and directors are launched, and at least one outrage can be expected every year. This year, too, the Danish director of the award-winning film Melancholia created a flutter by proclaiming himself to be a Nazi, for which he was promptly banned from the Cannes Film Festival. The Grand Prize, or the Palme d’Or, this year went to an American director, Terrence Malick. The last time an American won this golden award was in 2004, when Michael Moore won the prize for Fahrenheit 9/11. Fahrenheit was not a feature film; it was a documentary on the US war on terror, and the invasion of Iraq. But its satirical and hard-hitting content made it the highest-grossing documentary of all time. Last year, too, another American documentary debuted at Cannes and went on to win the Oscar for best documentary of 2011. The film Inside Job by Charles Ferguson is a fast-paced detective-style story of the financial crisis of 2008. Its absorbing content of contemporary history makes it hard to believe that it is actually non-fiction! In a matter-of-fact style, completely free of jargon, with finest quality cinematography, the story is narrated by Hollywood star Matt Damon. It is told in five parts: “How we got here”; “The bubble”; “The crisis”; “Accountability”; and “Where we are now”. Without so much as an editorial comment, with its faithful recording of events, interviews and news footage, it pieces together the plot into a coherent story. Its commentary is mostly unsentimental, but you can’t miss the controlled anger. It is remarkable that even one year after its release, with an impending implosion of Greece and fears of a double-dip recession, the movie is strangely as fresh as when it debuted. The movie begins with scenic Iceland and casually mentions: GDP $13 billion, outstanding bank loans $100 billion! There is no simpler way of explaining leverage. The collapse of Iceland’s banks was the first domino to fall. This year it could be the Greek default that could trigger a fresh crisis. The crisis of 2008 has already been over-analysed in hundreds of books and articles. But the story hadn’t been told in cinema form, in a language simple enough to be understood by everybody, but not dumbed down. Terms like credit default swaps, collateralised debt obligations, securitised loans and risky derivatives are explained in painfully simple terms.
Mr Ferguson has methodically exposed the role of the financial services industry lobby in the crisis. Whether it is regulatory capture, or revolving door access to the White House and policy makers, or influencing rating agencies, the finger prints are everywhere. And yet, despite several Congressional hearings and detailed testimonies, there is not a single high-profile indictment as yet, and nobody has gone to jail, as Mr Ferguson pointed out in his Oscar speech. There have been arrests for sexual misdemeanour (such as Eliot Spitzer, former New York governor, who was also the state’s attorney general and prosecuted many Wall Street firms, and Dominique Strauss-Kahn, the former managing director of the International Monetary Fund), but none for financial fraud. Strangely, both Mr Spitzer and Mr Strauss-Kahn are the “good guys” in the Ferguson movie. But surely some criminal prosecution should have been possible. After all, the movie shows how the Federal Bureau of Investigation in the US had been warning of criminal activity in fraudulent documentation for subprime loans even back in 2005. Most high-profile Wall Street firms were fudging expense accounts to pay for drugs and prostitutes. Many of these firms were also shorting the very same securities that they were peddling to their customers. Wasn’t neglecting their fiduciary duty a criminal act? The non-pursuit of this line of prosecution, or indeed investigation, indicates that much remains unchanged in policy and regulation of financial services. The bonuses and earnings are higher than pre-crisis levels, and it is business as usual. A significant portion of the bailout money went into fattening the profits of Wall Street firms, and the residual players have become even bigger than the earlier ones who were too big to fail. (Dozens of banks did go into liquidation, only to be bought out by bigger sharks.)
The most novel aspect of the film, which is perhaps least discussed elsewhere, is the role of academia and economists in particular. The corrupting influence of money power on politics is well known, for that’s how the lobbyists prevented the regulation of derivatives or limits on leverage. Money power ultimately helped dismantle the Glass-Steagall Act, which removed the separation of investment and commercial banking. But the conflict of interest among academicians who were being paid to write favourable research articles about financial deregulation has not come under sufficient scrutiny. These economists also enjoyed lucrative board positions and consultancy from the same Wall Street firms. In the film, when asked sharp and direct questions, these academic dons fumble for words, or obfuscate, or simply stonewall. Some get angry that they are being exposed, and ask that the camera be shut off. This cast includes former Chief Economic Advisors Glenn Hubbard and Martin Feldstein, and Federal Reserve Bank Board Member Frederic Mishkin. Professor Mishkin had actually authored a report eulogising Iceland’s banking as being the most advanced and robust, but failed to disclose that he was paid for it. Others who declined to be interviewed by Mr Ferguson must be thanking their stars. Nobody is spared, not even US President Barack Obama’s Chief Economic Advisor Larry Summers, Ben Bernanke or Alan Greenspan.
For many years there has been talk of global imbalances. These refer to high trade deficits in America and Europe, and high trade surpluses in China. These also refer to large fiscal deficits and now debts in the West, and large holdings of that debt by China and other Asian economies. It is claimed that persistent global imbalances can lead to sudden and drastic disruptions, and maybe the Lehman crisis was such a manifestation. Also, it may be apposite to highlight the growing imbalance in economic thinking. The western academics and leading universities are propagating an economic orthodoxy. This has to be questioned, if not jettisoned. But worse, the purveyors of the orthodoxy may be flirting with criminality, in not disclosing their conflict of interest. That’s a serious imbalance.
The author is chief economist, Aditya Birla Group
The views expressed are personal