Inside Job

My wife and I watched Charles Ferguson's Inside Job on one of the cable channels last night.  The film is one of the best documentaries in the past decade--based on my limited sample it is second only to Errol Morris's Fog of War.  One of the film's premises is wrong, though. The financial system did not operate well before 1980.  Mr. Ferguson may not remember the 1970s' stagflation (13.5% inflation in 1980 plus 9.7% and 9.6% unemployment in 1982 and 1983 respectively), when the economy was worse than now.  The American financial system has been unstable since the establishment of the Federal Reserve Bank, but Ferguson glosses over the role that the Fed played as the source of the bank credit that expanded so rapidly in the early 2000s.  In fact, the massive expansion of real estate loans that caused the problems beginning in 2007 was due to the Fed's core mission of managing the money supply. Milton Friedman was as much to blame for today's fallen economy as his acolytes Ben Bernanke and Alan Greenspan. 

As well, the film overrates regulation.  There were bubbles in the 1950s and 1960s, including the "nifty fifty" bubble of the late 1960s and, as well, corrective recessions in the 1950s, 1960s, and 1970s.  The greater degree of regulation of that era was not what caused the post-war bubbles and recessions to be less severe than the early and late 1970s, early 1980s and today's. (Of these the early 1980s was the worst period, although today's problems are likely to be extended much longer, possibly for decades.)

Rather, the Fed was constrained from printing money by the gold standard, which Nixon abolished in 1971. Subsequently, there was the stiff inflation of the late 1970s, followed by the sharp correction of 1979-82, followed by the 25-year bubble starting in 1982. Reagan reignited inflation (why sources like Newsmax keep attributing Volker's policies to Reagan is a mystery; Carter appointed Volker and Volker's anti-inflation policies were initiated under Carter), and the 25 years of stock and real estate bubbles were largely due to the Republicans, especially Reagan and George W. Bush.  The excuse that the Democrats pushed for sub-prime mortgages is lame. Had the Fed expanded the money supply as it did under George W. Bush and there were no sub-prime mortgages there would have been other kinds of bubbles and similar results now.

Thus, the film is marred by Ferguson's lack of understanding of the role of the central and commercial banks in creating any and every financial bubble starting with the first bubble in 1790, which involved speculation in the stock of the First Bank of the United States, and his failure to question the necessity for Wall Street and the financial industry at all--an industry that requires $16 trillion or more in public subsidies may be said to be a cancer on the economy, not a legitimate part of it.

Despite these criticisms the film is chock full of important information. The penultimate segment on the corruption of academia is understated. As a Columbia Business School Ph.D. alum I found it embarrassing to see two of the senior faculty (Professor Mishkin and Dean Hubbard) humiliating themselves in public, but the filmmakers did nothing wrong. The professors spoke for themselves. Actually, I think they are less corrupt than the left wing faculty who have for decades supported totalitarian murder in the name of humanism. Viva Che.

Inside Job gets a B+ or 88% for accuracy. For entertainment value, the grade is higher, A-. If you followed the news surrounding the bailout the information is not all that surprising, but it is well put together and it is fascinating to see some of the players. I had no idea that Lloyd Blankfein looks like a weasel, for instance. Weasels on welfare make for a spectacle indeed.