By Preeti Vissa and Regina Davis
The Best Documentary Oscar for “Inside Job,” aside from being a deserved award for a well-made film, is also a reminder of how wildly off-track the debate about economic recovery has gone. Watch the film (out on DVD March 8 ) and marvel at how much structural reform is needed, and at the irony of how much the Republican House majority is doing to thwart what reforms have already been enacted.
The film shows how a deregulated environment separated lenders from the consequences of their actions, producing an enormous housing bubble built on a foundation of wishful thinking, speculation, inflated appraisals, bogus bond ratings and outright fraud.
In the resulting speculative frenzy, lenders could make a fast buck (hundreds of millions of fast bucks, actually) by making sub-prime loans, often misleadingly marketed to gloss over hidden time bombs like exploding interest rates, quickly bundling them into securities called collateralized debt obligations and selling them to investors. Without any sort of meaningful oversight to ensure that increasingly complex financial instruments bore some connection to reality, financial operators simply made stuff up — from phony home appraisals to AAA ratings given to securities that by any sane measure were nearly worthless.
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Much of what happened during the bubble was insane, like loans that required no documentation of income while mortgage brokers pressured buyers to overstate their pay. While home prices skyrocketed, it was easy to ignore that the whole boom was built on air.
“Inside Job” also documents the revolving door between the financial industry, the agencies that theoretically regulate it and the academic world where economists churn out theories used to justify that regulation — or, more often, the lack thereof. Travelers through that revolving door include Henry Paulson, who became Secretary of the Treasury after a stint as CEO of Goldman Sachs and is now a fellow at the Johns Hopkins University School of Advanced International Studies. Another is Peter Orszag, President Obama’s first budget director, who recently joined Citigroup’s investment banking group as a vice chairman.
While some argue that the Wall Street reform law passed last year didn’t do enough to re-regulate the financial industry and reduce the chances of another bubble-meltdown cycle, the law included a number of good provisions. One of the most important created a Consumer Financial Protection Bureau.
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And House Republicans are trying to destroy CFPB before it even opens for business.
CFPB, now setting up shop and set to start operating this summer, has the job of making sure the financial industry operates honestly. It aims to ensure that consumers are given complete, accurate information about financial products and to eliminate the tricks and traps that caused so much misery and helped explode the economy. Weeding out those tricks and traps will ultimately lead to a more stable, effective system, because banks and other institutions won’t be able to boost short-term profits by fooling consumers at the expense of long-term stability.
On Feb. 18, Politico reported that the agencies charged with implementing financial reform “are starving for money,” with Republicans in Congress intent on keeping it that way as a tactic to stall implementation. This could impact not only the Consumer Financial Protection Bureau, but also other agencies such as the Securities and Exchange Commission that have new responsibilities under the law.
Amazingly, just three years after an unregulated financial frenzy sent us into the worst economic collapse since the Great Depression, the debate in Washington is revolving around the myth that all we need to do to fix the economy is to cut spending and reduce regulation. That’s crazy, and the Oscar for “Inside Job” is a good reminder as to why.
Preeti Vissa is community reinvestment director at The Greenlining Institute, www.greenlining.org. (Greenlining co-founder Bob Gnaizda is featured in “Inside Job.”) Regina Davis is CEO of the San Francisco Housing Development Corporation, www.sfhdc.org