Alan Greenspan - reflections on the movie "The Flaw"

Overview

The title of the film is taken from a confession by Alan Greenspan, the former Chairman of the Federal Reserve, to a Congressional Committee in October 2008. Greenspan acknowledged to the committee that after 40 years of using his financial and behavioural models he was concerned that he had discovered that they contained a flaw. The premise of the film is that this flaw (error/omission) was partially responsible for the Financial Crisis (FC).

The title of the film is also its hook-line. There is an inference in its title that the film itself would reveal to the audience exactly what Greenspan’s flaw was and link this to the damage caused by the FC. If these issues were intentions behind the film then they could have been more clearly conveyed.

The film rather than being an expose on Greenspan’s flaw was for the main illustrations of the impact and a discussion about the FC. An intention of the film seems to be the education/enlightenment of the audience.

The film is a dramatised documentary built around a series of interviews with ‘ordinary’ Americans who had been severely impacted by the FC. These interviews are interspersed with interviews with some of America’s economic experts and also flashbacks of various historical mainly news footage. In many ways the film is collage of perspectives about the FC. The film although promoted as a cinematic film is more akin to a television documentary.

Film Specific Points

The film did not include any footage of Greenspan explaining his model(s) flaw. The audience were left to infer this central pillar of the film for themselves. In his October 2008 presentation to the Congressional Committee, Greenspan explained that he had previously assumed that financial firms “would not imprudently borrow or lend to protect their shareholders”. Greenspan had assumed that the negative impact of bankers’ self seeking behaviour on the wider economy would be minimal. This he explained was his flaw. Sadly Greenspan's clarification was not included in the film.

It should be noted that faced with mounting evidence that his models had not predicted the FC Greenspan had little option but to publicly admit to some degrtee of personal failing. He did not refer to his own personal failings directly but rather he pointed to an understandable although regrettable fault in his models. The film did not highlight that he faced this personal dilemma and the option he chose to coness it.

It seems that the title of the film infers that if Greenspan’s flaw had not occurred then his decisions as Head of the Fed would have been different and somehow the FC might have been averted. Otherwise, why would they film makers have chosen the title that they did? Given that this inference, this premise, was probably unrealistic, was the film destined to disappoint it audience before it began?

Films normally tell stories. This film did included footage-snippets obtained from ‘here, there and everywhere’, but arguably failed to weave them effectively into a compelling yet complex story. The film did not clearly describe the big picture of why the FC arose.

Most films, even documentaries, are generally about human beings struggling against identifiable ‘opposition’ with the intention of achieving personal goals. This film had ‘interviewees’ and ‘experts’ not ‘characters’ in the sense they are normally portrayed in films. The interviewees in particular were portrayed as being passive not ‘fighters’, caught up in personal tragedies that they barely understood and couldn’t materially influence. These people, having chosen to be part of the great housing boom, were portrayed as being reduced as little more than hapless victims of its decline. Presented this way we, the audience, had little reason to empathize with them. The optician came across as financially ignorant having little understanding of her options. The economic correspondent was astounding for his ability to separate his technical knowledge (required to be a financial journalist) from his foolish decision to overpay for his house. If these key people had been shown fighting back, even against impossible odds, we would have seen as real people, related to them and cared.

Other omissions from the film included the lack of any possible solutions to the FC and no attempt to hypothesise where it might all lead. This lack of insight by the films makers is regrettable. The film sought the financial community’s failings with torch light intensity. Having found some of them it let them be. In this respect the film makers were almost as ‘passive and hapless’ as their interviewees. If the film’s maker had applied their collective vision and insights more proactively then the film it would have been a more positive experience for the audience.

Economic Issues

The words Greenspan’s chose to use to describe his model(s) flaw; that financial firms “would not imprudently borrow or lend to protect their shareholders” were more political than accurate. He could have said for example that he now realised that “left to their own devices the investment community will do whatever it can to enrich participants and shareholders alike.” The limited nature of Greenspan’s confession could also have been included.

The film infers that Greenspan placed too much emphasis, even faith, in the “Efficient Market Hypothesis (EMH)’. Although the EMH has been taught as core economic knowledge in Western universities for a generation, anyone with personal critical facilities will have realised that their real world doesn’t function according to the assumptions of the EMH. Most markets are not free but are to some extent restricted and regulated, most participants are not well informed and market forces alone do not dispense financial justice on the unwise. It should be clear from the Dot Com boom and bust that financial markets in particular are inherently unstable and march to their own mix of emotional and logical beats. If Greenspan didn’t understand these self evident truths then the USA unknowingly was living with a very serious problem. I assume that Greenspan did not place undue emphasis on the EMH and did not uncritically accept it underlying assumptions. Given this, was the films emphasis on this point unbalanced?

The film showed how in ‘earlier times’ the banks regarded mortgages in ‘white’ suburbs to be better credit risks than inner city ‘mixed race’ areas. Encouraged by a political philosophy of ‘righting this historic wrong’ banks and other lending institutions began lending to these previously neglected areas. The film presented this change as financial opportunism by the financial community. My view is that the change that occurred was broader and deeper than financial opportunism; it was a change to the social fabric of America. America went through a mini revolution, a social change of historic proportions. The underlying intention of this change was the wider distribution of the benefits of middle class homeownership. This min revolution necessitated a broad change in political, personal and social identity from the grassroots up. This change embodied the desires, aspirations and behaviours of millions of previously ‘un-creditworthy’ Americans as well as their political leaders. Successive administrations of both parties trumpeted a political philosophy of home ownership for all Americans as being a political priority. Sadly this change was doomed from the outset. This change at the nations’ heart achieved the opposite of its intention. It failed to deliver positive outcomes because it didn’t give sufficient heed to the need in financial life to discriminate on the basis of affordability. The film as well as the society as a whole failed to identify that the driving force behind the financial boon and crisis was a desire social change. The film ignored the political underpinning of the crisis. The film choose to present the common view that it was the financial greed of the few that had brought financial desolation upon the many.

This mini social revolution did not improve the welfare of the poor, it was ended to help; it striped many of the little they previously had and destined them to a future life of poverty and financial hopelessness. The wealth of the populace had evaporated under the omnipresent heat of falling property prices. The issuing of unaffordable loans; sub-prime, NINJA, liar and predatory loans were central to the tsunami of lending built up and then brought down America’s social and economic wealth. These were the tools the system used to create an unstable and unsustainable world, they were excesses of the giant financial bubble, but they were not the primary cause. The financial institutions, the people’s bogeymen, were arguably little more than the couriers of massive social change.

If Greenspan’s models had a major flaw it was their failure to capture social change where they were most deficient, not because they were overly reliant on the EMH. It seems therefore that Greenspan may have confessed to one failing but completely missed and even greater one.

The financial institutions saw the great social change as new opportunity to make profits and there is little doubt that they exploited it. The originators of the loans will have known that many of the people they were lending money to could not afford the repayments and that the only hope of long term solvency lay with ever increasing prices. Faced with the prospect of suffering from mortgage defaults these originating institutions found ways of transferring the known risks to in many cases unsuspecting and willing others. To do this they create a number of ‘now toxic’ financial instruments credit default swaps and the like. The film showed an ex bond trader defining a CDO as being toxic. He was probably right. Although not illegal these new instruments can easily be judged as being immoral. The market for these products was not flat and all of the participants were not equally informed. The authorities, including the Fed and the SEC would surely have been aware of this inequality. But, perhaps because these instruments were seen as bringing about the ‘great social equality’ they were left unregulated. The risks the posed to the whole system were ignored. A question that has and should again be asked is “is Wall Street too smart for the Fed?” or perhaps more crucially, “Was the Fed hamstrung because of its allegiance to its political masters?”. With these new instruments in place, there was every reason that a reckless credit supply would explode, and it did. The die was cast, models or no models.

It was the political and social bedrock of America, often too uniform and too shallow, that nurtured the financial crisis. This bedrock is the way the USA sees itself; its attitudes, aspirations and collective delusions. The film showed cartoon settlers arriving from Europe in cartoon sailing ships. They came, aspiration in hearts, tools in hand, driven by the common desire to build a better future for themselves. Their culture was aspirational, forward looking and positive. It was impulsive, risk taking and at times greedy. It was a culture of the now, of the young. It is a culture that has persisted through America’s history and drove the FC. It is not a culture of the wise, it doesn’t reflect, it doesn’t review and it doesn’t like to be questioned. It pushes forward even when evidence is piling up against the folly of past choices. It doesn’t change course easily. It is the culture that, for eternity, has lead young men to war only to die and have their blood seep unceremoniously into inglorious mud. It collided with the limits of natural market forces and crashed.

In my opinion Greenspan’s main flaw, as the most powerful financial man in the USA, was not to make an error in his financial modelling it was to misunderstand the dynamics of the society he overlooked.

Summing up

America has now changed irreversibly as a result of the FC, and so too has the wider world. The USA is now a rapidly aging country. Its best years are behind it. Its future promises enormous financial, social, political and military challenges, where once it had prospects. The USA must now tackle these challenges while carrying the burden of the financial damage it has wrought upon itself. It is time for the USA to reflect and build new social and financial bedrock?

If Greenspan had identified this society wide phenomenon and had built models that adequately captured it, could he as a politically tied man have stood against the tide and made that kind of difference? I doubt it very much. One man, even this most powerful of financial men, could not have materially altered the financial destiny of America.

The issues that the film could have dealt with are diverse complex and also fundamental. They are as political, philosophical, and psychological as they are financial. They are about broad social behaviours as well as the behaviour of bankers. They are about beliefs and identity and about balance and diversity.

The American FC has now morphed into a Global FC. After sixty years of living in relative peace, prosperity and having standards of living that were only possible because of the shelter provided by umbrella of American global dominance, the Western world faces a much less certain future. It is troubling for all of us to realise that this uncertainty was largely brought about by an America whose leaders unwittingly shredded the protective canopy that too centuries to build. Points I wish this film had made.

This post has been made for entertaunment purposes only. I'd really appreciate some feedback.