Inside Job

In class this week we viewed Sony Pictures’ Inside Job, a documentary about the systemic corruption within the United States’ financial system and how it caused the 2008 market meltdown.

Over the course of the semester, it has become clear that there were many factors, which caused the 2008 market meltdown. However, all of the problems stem from an unregulated financial system. When Ronald Reagan took over the presidency in 1980, he began a deregulatory policy that would continue for 30 years. This policy created a “free-for-all” in the markets. Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDO’s), which they sold to investors. In turn, commercial banks began approving loans for anyone that wanted one because either way they were getting paid. People also began investing heavily in over the counter derivatives because they were advertised as a good investment, but in reality they were incredibly toxic.

Isaac Newton’s laws of physics states every action, has an equal and opposite reaction. Even though he used this law applies to physics, it also explains how the financial markets function. Whenever the market heads positively in one direction, it eventually will peak and head equally in the opposite direction.

In 2008, the financial market kept with this trend by correcting itself. However, since the economy had grown so positively large that when it peaked and headed in the negative direction, it had an enormous negative effect. There were some people, like Brooksley Born, who predicted this detrimental market correction and attempted to stunt it. Born discovered how toxic over the counter derivatives were and moved to regulate them.  Unfortunately, Alan Greenspan and others on his team were adamant about keeping the markets unregulated and blocked every attempt Born made to regulate any part of Wall Street. If we want to avoid another financial crisis like this in the future, we need to regulate the markets.

The phrase “too big to fail” applies to the interconnectedness of the investment and commercial banks on a global level. It means that these banks have grown so large that if they fail, they will stall the global economy and therefore the government is forced to bail they out. This is an unsafe public policy, especially without any type of regulation, because then the banks have no moral standard to live up to. Banks can assume that if they’re large enough, it does not matter how many mistakes they make since the government will bail them out if they get into trouble. Policy makers should really look into an effective way to regulate the financial market.

Derivatives played a huge role in the financial crisis of 2008. They are a good example of excessive, over-speculation that needs to be regulated. Investment bankers and investors alike did not fully understand their complexity and sold them off as a sure thing when in reality, they were incredibly toxic.

In theory an unregulated market makes sense, but unfortunately when you add in human emotion the system falls apart. As we have seen through readings, this video and other videos we’ve viewed throughout the semester, investors become easily blinded by greed and therefore overlook potential problems within the system. They also neglect to share information in order to get ahead of others which is why it is necessary for the government to enact some form of regulation.