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Hanna Christelle Ho

FINTMED

The Inside Job

The 2008 financial crisis had an article in The Economist entitled The Origins of
the Financial Crisis: Crash Course which said, With half a decades hindsight, it is
clear the crisis had multiple causes. The most obvious is the financiers themselves
especially the irrationally exuberant Anglo-Saxon sort, who claimed to have found a way
to banish risk when in fact they had simply lost track of it. Central bankers and other
regulators also bear blame, for it was they who tolerated this folly. The article also
mentioned the macroeconomic backdrop, the great moderation, the savings glut in Asia,
and the borrowing of European banks in American money markets. There were
consequences following this. A documentary film was made regarding this 2008
financial crisis called The Inside Job. The documentary film was divided into five parts:
Part I was entitled How We Got Here, Part II, The Bubble, Part III, The Crisis, Part
IV, Accountability, and Part V, Where We Are Now. It contained a lot of different
personal interviews. The documentary film was described by its director, Charles
Ferguson, as demonstrating the systemic corruption of the United States by the
financial services industry and the consequences of that systemic corruption.

Part I was about the Reagan Administration starting a deregulation period which
enabled the financial sector to have more freedom giving it a more favorable chance for
profit. Part II was about the time Securitization Food Chain. It was a system where

people who borrow obtain from the lenders who give the loans to investment banks, to
the AIG Insurance Company, and to the investors. It was described in the documentary
film as a new system which connected trillions of dollars in mortgages and other loans
with investors all over the world. People are no longer put to risk if they fail to pay.
Almost anyone in the US can get a home loan then buy a home. This paved way for the
prices to go up very high which was the bubble as a result since everyone can acquire a
mortgage. The financial sector also became immensely rich from earning profits
because of the Securitization Food Chain. Part III was about the bubble bursting. The
Securitization Food Chain provided and caused a negative effect on the financial
behavior. Lehman Brothers collapsed and Fannie Mae and Freddie Mac were taken
over by the central government. Both Lehman Brothers and Bear Stearns companies
had a big loss. Part IV was about the accountability, which showed that the executives
still kept their assets despite what happened. A lot of them did not take responsibility for
what they did or display regard for their actions. In the film, it was stated that The top
five executives at Lehman Brothers made over a billion dollars between 2000 and 2007;
and when the firm went bankrupt, they got to keep all the money. Part V shows
President Obamas needs to improve the financial industry, however the financial
reforms passed were weak. The last part contained different statements like the
financial industry serving others before themselves. It also states that those who were
responsible for the crisis still have power.

Moral hazard, as defined in Mishkins book is the asymmetric information


problem that occurs after the financial transaction takes place, when the seller of a

security may have the incentives to hide information and engage in activities that are
undesirable for the purchaser of the security. Markets must be properly regulated in
order for moral hazards to be prevented. In the documentary film the Inside Job, moral
hazard exists in where during good or bad times, even if money is lost, they would still
be able to receive desirable amounts. This was even before the downfall of the Lehman
Brothers, a firm for financial services. This can prompt the employees to take risks
because they could transfer the losses to shareholders. The shareholders, on the other
hand, could transfer it to the creditors. The creditors have restricted motives to
contemplate over major banks. There was this assumption the big banks would not be
allowed to fail. This assumption designated creditors to be more willing to lend. The
collapse of Lehman Brothers traumatized the assumption that a major bank would not
fail. The Securitization Food Chain was also a problem in the documentary film. Those
people only saw or looked at the advantages that they were getting, they merely
bothered to check what could go wrong with the system. Brokers who brings loans to
banks gets acknowledged and paid for their work but they show no duty or fault for
negative things that happened. Things like the deregulation, fraud, and the conflict of
interest led to the financial crisis of 2008.
The moral hazards must be addressed in order to further prevent future financial
crisis. The last lines in the documentary film which says For decades, the American
financial system was stable and safe. But then something changed. The financial
industry turned its back on society, corrupted our political system, and plunged the world
economy into crisis. At enormous cost, weve avoided disaster, and are recovering. But
the men and institutions that caused the crisis are still in power; and that needs to

change. shows that in order for the problems to be fully solved the main cause of the
problem must be fixed first. In order for a system to work properly, the very main cause
of the flaws must be eliminated first because even if things are going smoothly now,
there is no guarantee that problems would not occur later on or even if one problem is
fixed, it can not be said that the same problem would not be faced anymore,