“The Flaw: Markets, Money, Mortgages and the Great American Meltdown”
“The Flaw: Markets, Money, Mortgages and the Great American Meltdown”
A Movie by David Sington; Distributed by Bulldog Films
“The Flaw” is an ambitious effort to explain to its audiences what caused the “Great Recession” of 2007-08, and to suggest some of the economic consequences on “ordinary people.” To do this, it weaves together a history of economic development in the US, provides excerpts from a contemporary tour of Wall Street by a former Wall Street bond trader, discusses the explosion of debt in this country, details the increasing economic inequality in this country, and illuminates some of the impacts of the housing crisis on people.
To explain what happened, “The Flaw” brings together a wide range of analysts. It includes a number of interviews with academics, many of whom are faculty on some of the most prestigious universities in the country, including Harvard, Yale, Cornell, Columbia and Duke, as well as one from the London School of Economics. There is a well-spoken financier to help understand some of the practical aspects of these issues. There is also a woman who works at a “corporate watchdog” institute, another women from a Brooklyn-based community development organization, and a former bond trader who presents material from his point of view. The perspectives of these “experts” are joined by “ordinary” people, some of whom were investors in the real estate markets of the early 2000s, as well as others who simply tried to refinance their houses to keep themselves in good economic shape. So, and this is a real strength, the movie incorporates a broad range of viewpoints to try to explain what happened.
And all of this—with a lot of interesting information and data—is assembled in this movie to show the consequences of “the flaw” in the thinking by former Chair of the Federal Reserve, Alan Greenspan. Greenspan, who has long been given almost mythic status in the mainstream media, had believed—as was shown in series of cuts of him being interrogated by Congressman Henry Waxman, Chair of the House Oversight and Governmental Reform Committee—“in the self-regulating nature of markets”; in plain language, in the ability of capitalism to regulate “itself.” (Unfortunately, although this was the “hook” for the movie, it wasn’t tied in well, and the movie went long past its relatively small part near the beginning and short part at the end.)
And in this process, “The Flaw” provides considerable information. One of its real strengths is that it explains what are CDOs (Collateralized Debt Obligations), which were central to the housing crisis. Basically, those institutions (banks, finance companies, and federal institutions such as Fannie Mae and Freddie Mac) who “originated” mortgages—i.e., got buyers to sign the papers in exchange for a housing loan (mortgage) to buy a house—would combine the mortgages they held, categorize them according to the risk of non-payment, and then sell the mortgages in each category to the “secondary market.” (A CDO was an “investment” document, backed by the mortgages in a group, which could be bought and sold in financial markets.)
Basically, the idea was that instead of holding the mortgages until they were paid off (usually 30 years), which tied up the originator’s money for the entire time—during which they couldn’t re-loan that money and make even more money—the originators would sell say 100% of the value for only 80%, but from which the money was available upon completion of the sale to a “secondary” buyer. Now, a group of mortgages that were deemed “less risky” would demand a higher percentage of the total amount, than those deemed “more risky” (and there were gradiations of risk for the different groups).
The idea, however, was that the risk for each group of mortgages could be ascertained accurately, and that a group of mortgages could be sold to institutions that, in turn, thought they could re-bundle their CDOs, slice and dice again (by risk), and sell them to the tertiary markets. And so forth, down the “food chain.” And at every level, investors thought they could profit on the CDOs they purchased.
There was/is a certain logic to this. But there were two flaws to this process. First, since the plan of the “originators” was to sell the mortgages from the beginning, they were less than diligent in determining whether people could actually repay their mortgages: they didn’t care, as some other sucker would be the one holding the mortgage once the originator sold it to a secondary investor. Ultimately, they even accepted “NINJA” applications, the mortgages applicants didn’t have to verify their income or that they were employed—they simply took mortgage applicants’ word for their ability to repay. (It sounds pretty stupid to me.) Thus, as the decade went on and diligence of originators declined as the search for even greater profits intensified, more and more the whole housing market was built on sand—and which is why the housing markets collapsed so quickly once they fell apart.
Secondly, though, that as long as people continued buying houses, everything appeared fine. Credit was easily available, people were able to refinance their mortgages from the equity they had built up in their house, or they used this money to buy larger houses, pay off their credit cards, etc. This kept up demand for housing, so as the economy kept humming, contractors kept building more and more houses, and larger houses at higher prices, and life was good. However, ultimately, they built more houses that could be sold.
Once this happened, then, builders started laying off workers and stopping future projects. As more houses entered the market without being sold, this caused prices to of existing homes to collapse, and together, this meant that many people who had financed and/or refinanced their mortgages at high rates with the hope of refinancing in the future at lower rates based on the increased value of their homes were unable to do so, ultimately trapping them with mortgages they could not pay. So, being unable to pay, more and more people lost their homes due to foreclosure, which threw more homes on the local housing markets, driving prices down even more. (In turn, increasing layoffs in housing and finance sectors also made it difficult for these laid-off people to pay off their mortgages, etc.) It was a vicious cycle, and a lot of people lost their homes due to this.
However, this normally would only be a threat to local housing markets. Except, this time, mortgage originators had sold their CDOs to national and international investors, and ultimately, this threatened the global financial system.
So, the movie provides some good information.
The problem is, in my mind, that “The Flaw” is flawed itself. The biggest problem regards the manner of presentation: the director assumes that he has weaved all these stories together so well that the movie is self-explanatory without a “narrator” or some process to actually put things all together in a coherent whole. I don’t see it. There is a lot of good information in here as said above, but without someone to guild viewers, this wealth of information becomes overwhelming. This is a lengthy and complex movie, with too much information, especially without someone to guide the viewer through it. Thus, without a knowledgeable guide who can take viewers though the movie, start and stop when necessary, I would not use this movie for anyone who is not at least an upper-division finance undergraduate, or probably not even until viewers had reached advance levels of graduate training. (Obviously, even with a knowledgeable “guide,” there would have to be considerable amount of time to “work” through all the information provided.)
There are two other important “flaws” to the movie. First, although they talk about the great increases of incomes after World War II, they give no reason why this might have happened. Since this is key to economic growth, especially between 1947-73, it is not a minor point: the US emerged out of World War II as the only industrialized country in the world that was not devastated, the world needed our goods and services and was willing to pay, especially once we passed the Marshall Plan which allowed Western Europe to have access to great amounts of credit as long as they used that money to buy US goods and services. That helps explain why US corporations did so well after the end of the war.
But what this alone doesn’t explain is how the wealth created got shared so widely as it did: after all, the incomes of each quintile of US society doubled between 1947-73, even after inflation was taken out: so we had real economic growth that was fairly equally distributed, and which further stimulated the economy. What caused that wealth to be distributed so equally was a strong, militant labor movement that forced the capitalists to share. You cannot understand where the “Great American middle class” came from unless you specifically include the importance of the labor movement—we had long had a small, professional middle class of lawyers, doctors, etc., but it was only with the strong labor movement that emerged in the 1930s-40s that you have autoworkers, steelworkers, packinghouse workers, electrical workers, etc., who could afford a place on a lake or a cabin in the mountains, and could send their kids to college. To ignore this factor leaves much of the economic growth of the 1950s and ‘60s unexplained.
And leaving out the labor movement also means you cannot explain the massive increase in income inequality, especially since 1982, where we are by far one of the most economically unequal “developed” countries in the world: it’s been the worsening disintegration of the labor movement that’s been a key factor in this.
Thus, increasing global economic competition has drastically reduced US economic growth since the late 1960s-early ‘70s, and what growth there has been has been increasingly unequally distributed.
And yet, there’s an even bigger flaw in this movie. Just as it uses a piece of economic propaganda from 1954 to illustrate some points—inaccurate, too, as somehow it doesn’t mention slavery in the history of this country, nor imperialism, and a lot of it is difficult to stomach—the movie also acts like our society is the same as it was in 1954: almost everyone who has a significant piece of the film, and especially in providing analysis, is a white male. Now, I’m not saying no white males should be included, but aren’t there people of color, along with white women, who you can use to help analyze the contemporary situation? The only significant people of color who are included are an Asian-American, a former bond trader who leads tours on Wall Street—whose role in the movie is ambiguous at best, and who provides little real information—and a West African-sounding woman (Ghanaian? Nigerian?) who got abused in the process of refinancing her house. There are only two women included who are not victims—and one has a minute role, while the other is brought in late in the film explaining the impact of the housing crisis on poor and working families. Considering this film was apparently made in New York City, this is a travesty.
In short, an interesting, and provocative film, but one that accepts the shibboleths of mainstream economics, although with a critical viewpoint of it. This is certainly not a radical film. I can be used to get at bits and pieces of the crisis, but it needs a lot of help to provide the quality of analysis that I think it thinks it provides.
Kim Scipes, Ph.D., is an Associate Professor of Sociology at Purdue University North Central in Westville, Indiana. His latest book is AFL-CIO’s Secret War against Developing Country Workers: Solidarity or Sabotage? (Lanham, MD: Lexington Books). He has written widely on economic sociology, and his latest piece is on-line at awww.zmag.org/znet/viewArticle/21584 . Dr. Scipes can be reached through his web site at http://faculty.pnc.edu/kscipes.