Inside Job: How a perfect storm is made.

A Book Review

Introduction

Inside Job: The Financiers Who Pulled Off the Heist of The Century is a book which is written by film maker Charles Ferguson. The book can be seen as the supplement of the 2010 movie with the same name. Unlike the movie which won the 2010 Academy Award for Best Documentary Feature, the book received lesser attention. However, this does not mean that the book is just a boring adaptation of the movie. Rather it provides extra information and some interesting viewpoints of the 2008 financial crisis which were not used in the movie.

Book overview

Due to the length limit, in the movie the beginning of the story was only mentioned briefly. But the book gives a very detailed context of how everything evolved into the final disaster. In the book, everything started in 1980s when Regan administration started to deregulate the finance industry which was still under strict rules for what it caused in the 1929 great depression(Ferguson, 2012 , p.24). When Clinton took the office, the deregulation accelerated. At the same time, the industry itself also under the pressure of change due to both a decrease in sources of income and the technology innovation with the introduction of computer system.

Charles listed three major forces which opened the pandora’s box of American finance industry: the upheavals of the 1970s; the information technology revolution; and deregulation(Ferguson, 2012, p.29). With the combined force of these three, the ecosystem of finance industry was completely changed. Before that, financial institutions are often “small but stable”. Goldman Sachs in 1980s for example, only has 2000 employees compare to 34000 in 2010. The employees of this industry consisted of “old school elites” who normally risk their own personal money under private partnership and value reputation and trust. With both the government’s vision of building a strong finance sector and the innovation of new financial products such as derivatives , people who seek opportunity flooded the industry and a lot of them had not received any basic training of business ethics. With the lowering of standards and the encouragement of risky actions, the 2008 financial crisis is just the end product of a 30-year-long chaotic era with countless crimes and smaller market crashes.   

In the second part of the book, Charles focused on the direct reason of the 2008 financial crisis. The subprime mortgage loan alone does not create any problem if treated properly. But with the opportunistic behaviour of unethical bankers and the dirty bonds built between regulators and the industry during deregulations, subprime mortgage was packaged into new financial products and sold normally without any warning. This  was the major reason behind the finance and housing bubble in 2000s (Ferguson, 2012, p.54). ironically, many subprime mortgages was lending out not for the use of buying house but personal consumption which is a huge violation of operational rules of banks.  Charles specifically mentioned Wamu and Long Beach as the examples of typical mortgage lenders in this era(Ferguson, 2012 , p.61). They all promoted a toxic culture of worshiping “big bucks” instead of reputation and ethics

Other participants in this huge scandal are not innocent either. The rating agencies(Ferguson, 2012, p.108) was accused of helping financial institutions to fake a safe image of dangerous subprime mortgage derivatives. The law system did not work properly and intentionally or unintentionally helped those financial criminals avoid their punishment(Ferguson, 2012, p.163).  universities were also found of building monetary ties with these violators and avoiding criticizing the wrongdoing of the system(Ferguson, 2012, p.245).

In the end of the book, Charles discussed what can be done to prevent another similar disaster in the future(Ferguson, 2012, p.334). He gave out several advises in his mind. These include a stricter regulation, a better monetary policy, a reform of tax system and a re-education of business ethics and service quality. Despite his ideas are very brief and none of them are fully developed, they provide some basic approach to what could be done in general.

My thoughts and evaluations

Charles described the whole mortgage bubble bursting as a perfect storm. It is not caused by any single person or incidence, but the aggregate result of misbehaviour of an entire industry over a long period of time. For the long time before 2008 crisis, the Homo Oeconomicus, or the “economic man” theory dominated economic studies. Yet the real world is not as flawless as the model. Countless examples has shown that human are irrational in nature. The concept of the market will self-balance due to rationalization of participants is not only incorrect but also a misinterpretation of reality. Just like the enormous amount of evidence in the book, if there is a void of regulation, the irrational nature of human will seek to break the rule or even conduct crime ignoring the potential consequence it may cause. Luckily, with the crisis occurred as a perfect storm of irrational of human behaviour, modern economics started to change its direction. With the behavioural economist Richard Thaler winning the 2017 Nobel Prize in Economics, economic studies become more realistic and use more experiments and sociology theories instead of mathematical modelling.

Every bubble was created by the irrational participants of the market (Dufwenberg et al, 2005), Thus Charles believe strict regulations are needed for the greater good of the finance industry and the economy as a whole. I too believe that to prevent the next man-made financial disaster, the whole sector would need to be cautiously monitored and regulated. From the authority side, research has shown that inappropriate monetary policy (a sharp increase of benchmark interest rate during the peak of the bubble) can be devastating to a shaky system(Kamran, 2011). This means the policy makers should get in touch with the market more closely in order to not worse the problem and cause unwanted volatility.

Conclusion

Overall, the book is a well-written piece of work which I adored to read through. Despite not being a professional in economics, Charles Ferguson developed his own way of interpreting and investigating the topic which he was interested in. To understand the concepts and theories behind the book, a basic knowledge of how economics and finance work is needed. This means for anyone who does not receive this level of education, the movie is a better choice to understand what happened behind 2008 financial crisis. The financial crisis itself is a complex event involves so many different people and organizations. It is hard to say that any of them is the major cause of it. Charles’ book provides a comfortable mix of information which is needed for any reader to make his own judgment.

Reference

Dufwenberg, M., Tobias, L., and Evan, M. (2005). Bubbles and Experience: An Experiment. American Economic Review, 95 (5): 1731-1737.

Ferguson, C. (2012). Inside Job: The Financiers Who Pulled Off the Heist of The Century. Oneworld Publications.

Kamran, A, G. (2011) : 2008 Economic Crisis Analysis: The Macroeconomic Approach, International Students Conference on Economics and Finance, Albania, ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg.