The Big Short Goes Long on Bias

For most people who see The Big Short, what it teaches about the 2008 financial crisis will likely be the sum total of their knowledge about the event. And that is troubling. The movie is entertaining and offers a good description of securitized mortgages and similar financial instruments but oversimplifies the cause of the crisis as the greed of bankers. Worse still, it omits important facts that about the crisis that are at odds with this explanation.

The Big Short has been nominated for Best Picture. Its great commercial and critical success may portend Hollywood’s growing capacity to manipulate public opinion, because the film perfects a smoothly innovative form—the hybrid fact-fiction documentary. Except for Michael Burry, the characters are fictional but loosely based on real people. This fictionalization creates a powerful mechanism for spinning the facts to support a tendentious and politically motivated thesis.

The movie’s most important omission is the role of government in creating the crisis. First, there is never any mention that banks had incentives to make bad loans because they could offload them to Fannie Mae and Freddie MAC, government-sponsored entities that were effectively supported by the full faith and credit of the United States. Second, the movie implies that large banks exploited their position as entities deemed “too big to fail,” but never acknowledges that the United States government bailout of Bear Stearns reinforced this doctrine. Indeed, the failure of Lehman Brothers – depicted at the end of the movie – was almost certainly caused by the Bear Stearns bailout. Because of it, Lehman thought it could pursue business as usual rather than putting itself up for auction.

A fundamental truth of banking law is that government is so pervasively and sometimes perversely involved in banking that its actions are a substantial cause of banking crises. Attributing the recent financial crisis simply to greed is not very persuasive, because greed was hardly limited to the early twenty-first century. But the movie’s assignment of guilt does underscore a persistent Hollywood trope—that private enterprise is at the root of social dysfunction. Bankers surely deserve some blame for these disasters, but the actual allocation of responsibility is not captured by the cartoonish morality of this film.

The film does have some compensating virtues. It is very well acted. Moreover, it happily celebrates the value of eccentricity.   Among the few who thought mortgage bonds wildly overvalued came to their unusual perspective because they were eccentrics.  One was an autistic doctor with one eye, another a profane investor haunted by the suicide of his brother. Two others were kids out of college who had not been socialized in the ways of Wall Street. It shows how diversity of perspective leads to good results, and, contrary to another favorite trope of the left, that such real diversity can be found even among a group of white males.