The Big Short
The best educational film ever made
In every macroeconomics class I teach I spend a day covering the Great Recession. This has been a unique teaching experience because the events of the Great Recession are no longer in the collective memory of traditionally-aged college students. When I started as a professor in 2016, many college students were in high school when the housing market collapsed. They remember parents and family friends being out of work and losing their homes. Today, the traditional college freshman was still in diapers when everything went to hell. Teaching the Great Recession has gone from explaining to students what happened during events they remember to teaching about the past. It’s one of my favorite lectures to give, in part because I can use clips from one of the best movies ever made, “The Big Short”.
“The Big Short”, based on the Michael Lewis book with the same title, follows several characters, all real people or thin fictionalizations, as they navigate the 2007-2008 financial crisis. It is a brilliant film. It won the Academy Award for Best Adapted Screenplay, would have won the award for Best Editing any year that didn’t include “Mad Max: Fury Road” (the greatest action movie ever made) and was even nominated for Best Picture.
This list of awards is notable because “The Big Short” isn’t about superheroes, spies, or apocalyptic disasters. No one is overcoming adversity or changing the world. Instead, it's a film about the financial industry, centered around corporate politics and complex financial instruments. This is an impossible movie to make. How do you explain to people what a CDO is without putting the audience to sleep? How do you spend over two hours talking about banking, mortgages, and options trading while keeping people engaged? In “The Big Short”, you have an actor look directly at the camera, and without breaking character tell the audience that Anthony Bourdain will explain it to you using a halibut analogy. Unlike “The Wolf of Wall Street”, the story doesn’t rely on flashy yachts and degenerate drug use. The combination of Serena Gomez cameos explaining synthetic CDOs and witty rejoinders somehow works.
If nothing else “The Big Short” has taught me that any story can be made into a film. No matter how arcane or boring the subject matter. If you have a great cast, brilliant writing, and an editor who is savant-like in his ability to splice together clips, you have yourself a movie.
The movie is also commendable because it is accurate. Some concepts are necessarily oversimplified, but overall the issues are explained well. The financial instruments and consumer behavior that led to the Great Recession are explained in an easy-to-digest manner. The film does get a bit preachy at times, especially with its claims that instead of blaming bankers everyone will blame “immigrants and poor people” (I clearly remember the Occupy movement targeting “the one percent”, not immigrants or poor people). On top of that, congress did pass significant financial reform through the Frank-Dodd act. That aside, the movie does a great job explaining the issues.
Do watch the whole thing. If you cannot, the below clips are what I show to my classes.
The movie begins in the mid-2000s. The housing market is going ballistic. People are buying houses, not even putting on a new coat of paint, and reselling for a double-digit rate of return not even a year later. Everyone is flipping houses like crazy. Propelling this insanity are lax loan terms. Gone are the days when a prospective homebuyer was expected to have a steady income and provide a 20 percent down payment on a house. Instead, people were being given “NINJA” loans, short for No Income, No Job or Assets. Individuals could walk into a mortgage broker and walk out pre-approved for a mortgage without any income or money down. The result, of course, is that housing prices went through the roof. Money was being given to everybody.
Most people didn’t notice. Or if they did, they didn’t see it as a problem. Housing prices only go up, right? So even if people receiving NINJA loans default in a few years and have to be foreclosed on, the bank can just sell the house for a profit. Only a few realized that this system couldn’t sustain itself. That housing prices only constantly rise as long as there is more money coming into the system. That money can’t keep coming forever. In steps Jared Vennett, played by Ryan Gosling:
This is one of my favorite scenes in movie history. In eight and a half minutes, the entire premise of the film is set up. Jenga blocks and a constant stream of hilarious one-liners (“And somehow you're like the Dora the Explorer and you're the first person who found this thing” always makes me laugh) are used to deftly explain how the financial crisis started. Vennett explains that the housing market is built on a house of cards that is already starting to collapse. He has created a financial instrument that will pay out if the large mortgage bonds, the financial instruments that contain thousands of individual mortgages bundled together, collapse.
After the investment pitch, the hedge fund that includes Steve Carrell’s and Jeremy Strong’s characters go to Florida to investigate Vennett’s claims. Is there a housing bubble? The results are obvious:
And that’s how the Great Recession started. There really were low-income individuals who were being given loans for multiple houses. Brokers would issue mortgages and those mortgages were being sold to banks the next day without any due diligence. The collapse began with the housing market, but then quickly spread to the entire financial industry. That eventually leads to one of the most serious scenes in the film, and a great example of when silence is the most powerful form of dialogue. The look on Steve Carrell’s face when he’s told how big of hole Morgan Stanley is in tells it all:
I finish my lecture by explaining what happened after the movie ends: the government bailed out the banks. I voice my frustrations that the Great Recession isn’t discussed much anymore. There’s been a collective amnesia that seems to be relegating the Great Recession into that of the garden-variety economic downturn. The reality is the Great Recession was far worse than the rest. It wasn’t about a single industry imploding or the unemployment rate hitting seven percent for a year or two. The Great Recession was the worst economic downturn since the Great Depression. There were weeks when the entire financial system was teetering. It was not alarmist to say the entire system was going to come down, that America was in store for another Great Depression. This passage from the great New Yorker article “Eight Days” illustrates the sentiment:
That day, as investors rushed to the safety of short-term U.S. Treasury bonds, yields on three-month Treasury notes dipped below zero. “We watched the market for T-bills very closely,” Donald Kohn, the Fed’s vice-chairman, recalls. “You knew there was complete panic, and it was spreading.”
At the White House, calls were pouring in from throughout the financial world. “Even strangers were cold-calling me,” Keith Hennessey recalls. “They were all saying, ‘We see the beginnings of a run—a run on the financial system.’ The money funds were experiencing a run. People were literally pulling their money out and putting it in a mattress. Treasury rates went negative! People were locking in a loss just to protect their money.”
Geithner said, “It’s hard to describe how bad it was and how bad it felt.” He got a call from a “titan of the financial system,” who said he was worried but he was doing fine. His voice was quavering. After hanging up, Geithner immediately called the man back. “Don’t call anyone else,” Geithner said. “If anyone hears your voice, you’ll scare the shit out of them.”
Luckily, the system didn’t collapse. The government stepped in, bailing out the banks. They rewarded the very organizations that caused the crisis, but kept the system afloat. It recovered, and eventually became the booming American economy we know today, the envy of the rich world.