Episode 20 – The Big Short (1:50:41)

We bring on a special guest, Daniel J., to discuss the allegedly true (hence the asterisk) story behind the housing bust and subsequent financial crisis of 2008 as depicted in The Big Short (also a book of the same name by Michael Lewis) .  There is a lot going on here, and we don’t even get to the asymmetrical aptitudes of the players vs. the regulators, or the scandal involving the regulators spending their time looking at porn, or the alarm-bells being sounded by the likes of Brooksley Born that went unheeded.

 

The Big Short:

Here is the trailer:

Here is the marketing spin on the movie:

Based on the true story of four outsiders who saw what the big banks, media and government refused to: the global collapse of the economy. A bold investment leads them into the dark underbelly of banking, where everyone and everything is in question.

In 2008, Wall Street guru Michael Burry realizes that a number of subprime home loans are in danger of defaulting. Burry bets against the housing market by throwing more than $1 billion of his investors’ money into credit default swaps. His actions attract the attention of banker Jared Vennett (Ryan Gosling), hedge-fund specialist Mark Baum (Steve Carell) and other greedy opportunists. Together, these men make a fortune by taking full advantage of the impending economic collapse in America.

Needless to say, the Austrian-analysis disputes this and much more.  In the movie, they mention the following statistic:

Click to see the study cited

Based on what I see in that study, the number is dubious at best.  As we discuss on the episode.

Other things that we failed to mention were that these people in the film weren’t the only ones to see this coming (Ron Paul & Peter Schiff were talking about it for years) nor were they the only ones betting against the housing market (Kyle Bass):

 I believe that there is a role for leverage and for aggressive risk taking in the economy, but that role should be played by firms that are open and susceptible to the risk of insolvency and failure. Capitalism requires failure and bankruptcy as a consequence in order to guide behavior. As the old adage goes: ‘Capitalism without bankruptcy is like Christianity without hell.’ If we cannot allow a firm to go bankrupt, then we should regulate its activities so that it cannot engage in the sort of risky transactions that put it at risk of bankruptcy. To be clear, we should not prevent all firms from taking on leverage or engaging in risky behavior; we must ensure that they are not allowed to become Too Big To Fail.

— J. Kyle Bass, Testimony before the Financial Crisis Inquiry Commission, Hearing on the Financial Crisis

 

As you can see from the chart below, it was not “Deregulation” that led to, nor even contributed to the crisis.

Growth in Financial Industry Regulations in 1976-2009

For a thorough analysis of the 2008 Financial Crisis, please read Meltdown by Thomas E. Woods, Jr..  It offers a clear-eyed explanation of the causal relationship between government and the crisis.  The book is also a great introductory text to the Austrian School of Economics:

To go even deeper, check out David Stockman’s The Great Deformation:

And for those historically inclined who want the real dirt on the 1929 Great Depression, you owe it to yourself to read Murray Rothbard’s America’s Great Depression:

And for you audio/visual learners, here is Peter Schiff giving a presentation on Why the Meltdown Should Have Surprised No One:

And finally, if you are interested in learning how the banking system, the Fed, and the Austrian Business Cycle operations, check out this Murray Rothbard lecture:

Needless to say – the official narrative and the story told in the film are highly dubious.  We hope that you learn something in this episode and enjoy listening!

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