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What 'Inside Job' does (and doesn't) get right about the financial crisis

By Neil Irwin
Watching "Inside Job," the splashy documentary about the financial crisis that opens in theaters this weekend, is an odd experience for an economics writer.

I watched complex subjects that I've been immersed in for more than three years vividly unspooled for a mass audience, often explained by some of the very sources I've turned to (some of whom get pummeled in the process, but more on that later). So, what to make of this high-profile effort to offer the same kind of dramatic explanation of the financial crisis that "An Inconvenient Truth" provided for global warming?

It is an important film, an expansive -- and beautifully rendered -- indictment of the financial industry as it has evolved over the last three decades. It may well turn out to have a longer shelf-life, and do more to influence Americans' understanding of the crisis, than the dozen-plus books that have been written on the meltdown. That could be both a good thing and bad thing.

The movie
, produced and directed by Charles Ferguson, is at times irritating to a journalist who has been covering the financial crisis since its earliest days. It is, by design, polemical, and so has a proclivity for oversimplification, bias and the occasional odd touch. But at the same time, it gets at some deeper truths that we who report on these topics frequently miss.

Among the things that grated:

In their litany of alleged sins by the banking industry over recent years, the filmmakers cite things that have nothing to do with the financial crisis, such as the former Riggs Bank's ties to the Chilean dictator Augusto Pinochet and Credit Suisse's dealings with Iran.The filmmakers make hay out of the Gramm-Leach-Bliley Act, which allowed investment and commercial banks to merge. But there is little evidence that combining those companies intensified the crisis; indeed, the pure investment banks Bear Stearns, Lehman Brothers and Merrill Lynch (the ones that didn't take the opportunity to merge with commercial banks) fell into trouble before their fully combined competitors, such as Citigroup and Bank of America, did.

The movie attacks Treasury Secretary Tim Geithner and other engineers of the AIG bailout for not forcing Goldman Sachs and other parties that did business with AIG to take a haircut on what they were owed. But it does not acknowledge the time constraints and legal issues that would have been required to absolve some of that debt.

But in its overall indictment of Wall Street, "Inside Job" soars.The film's fundamental point is hard to rebut: Our financial sector became outsized, enjoying too much power in Washington, and spent the last decades fueling bubbles rathat than creating value for their customers. Those ideas may be old hat to those who have followed the public debate (especially on left-leaning economics blogs, but the movie makes its analysis accessible to a much broader audience than, say, Simon Johnson's "Baseline Scenario" blog will ever gain.

There were a couple of arguments that felt fresh:

The filmmakers explicitly assert that Wall Street executives who led the U.S. economy to the brink should be criminally prosecuted. There have been few civil penalties for finance industry professionals and no successful criminal prosecutions (the closest the government has come was a fraud prosecution against managers of a Bear Stearns hedge fund; they were found innocent last year).
In attacking Wall Street, prosecutors should go after executives as they would a criminal enterprise, such as the mafia, the documentary argues. For example, they could press cocaine and prostitution charges, vices they say are surprisingly common on Wall Street, and use the threat of jail time on those charges to flip witnesses to weightier financial crimes.

Yet the filmmakers offer no precise theory of what laws Wall Street CEOs violated, and, as the failed Bear Stearns case shows, vague fraud cases are very hard to prove. I also wonder whether interviewing former New York Gov. Eliot Spitzer, of the unpleasantness at the Mayflower hotel, as the prime proponent of this strategy hurts the argument's credibility. And, more generally, such a campaign risks criminalizing bad business decisions, which would not be a good thing for the country. But the arguments that Ferguson presents are worth thinking through.

The film launches a more persuasive attack on the economics profession as a whole. Economists, goes the argument, offered intellectual backing to the financial services monolith in part because of the five-, six- and seven-figure consulting contracts that big banks and hedge funds hand out.

Several economists that came under withering attack from Ferguson (Frederic Mishkin and Glenn Hubbard of Columbia Business School drew the worst of it, more so even than Martin Feldstein, the Harvard economist who was a longtime AIG board member),.

If there is one lesson that economics teaches, it is that human beings respond to incentives. And if one industry is routinely offering lucrative consulting contracts to top-flight PhDs, it's possible that some academic economists could become more sympathetic to that industry's goals and mindset, more resistant to calls that it be hemmed in.

Finding a way to avoid that is hard. It would be easy for a top university to ban outside consulting work by its faculty. But that university would instantly find itself at a severe competitive disadvantage in the hiring of top talent. And many business schools view it as beneficial when their scholars moonlight for the financial industry, in that the real-world insights they gain can make them better able to prepare students for the job market.

Still, the discipline needs to do some soul-searching and find ways to make economics scholarship something other than a highbrow appendage to the multitrillion-dollar financial sector.

In short, anyone who cares about financial and economic policy should see this movie. They just shouldn't take its assertions and characterizations at face value or assume they're getting the full story.

By Neil Irwin  | October 21, 2010; 1:58 PM ET
Categories:  Corporations, Financial regulation  
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