Over winter break, I watched a lot of films, and one of my favorite was Adam McKay’s “The Big Short.” It told the story of a few investors who predicted the financial crisis, and made a very profitable bet against the United States’ housing market. This movie helped me think about who was responsible for the 2008 financial crisis.
There are the obvious culprits — policy makers and risky lenders at major financial institutions — who have driven the public’s current anti-Wall Street sentiment. However, there is another less-criticized group of people who were profiting off the irrational exuberance in the U.S. housing market: the American consumer.
First, the risky lenders at the big banks and insurance companies thought that they could minimize risk while maintaining high profits by creating complex financial instruments such as credit default swaps. However, this backfired and led to an interconnected market that only needed a slight downturn to pop the bubble. In essence, many of the employees at the big banks and insurance agencies let greed blind their better judgement in loaning money, or underwriting insurance.
Second, the policy makers let real estate across the country become wildly overvalued by not raising savings rates quick enough. In my opinion, this was a major mistake by central bankers at the Federal Reserve because, with savings rates at such low levels, ordinary and corporate investors began looking for higher returns elsewhere. Obviously, this is easy to say in hindsight, but there were other mistakes made in the oversight of the financial crisis.
The credit agencies, such as Moody’s or Standard & Poor’s, failed to recognize that the mortgage loan bundles, which were classified as AAA credit ratings (the best rating possible) leading up to the financial crisis, were much riskier than their rating indicated. In part, this lead the public and private sectors to a false sense of complacency.
Third, American consumers over borrowed to improve their quality of life. In my opinion, this is a point that is not raised enough when having discussions about the financial crisis. Was Wall Street greedy? Yes. Were the regulators too passive? Yes. But, average Americans profited off of the bubble too; albeit, they paid a much higher price for their mistakes than the wealthy bankers did. Regardless, when blaming the usual suspects for The Great Recession, it is important to be self-reflexive and acknowledge the role that millions of Americans played in the crisis.
The following is a quote from Micheal Burry, one of the investors in The Big Short who predicted the financial crisis, in an interview with “NY Mag:” “The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others.”