The Big Short
Posted by coaldigger 8 years, 3 months ago to Economics
I watched the movie and liked it but felt they left out a very important part---Big Brother. Michel is very clever in the way he gets the reader to follow his logic under the guise of a movie review. He carefully pries open your brain and inserts some wisdom instead of trying to beat you over the head with it and hammer it into your skull. I think a lot of people have important ideas and more people would listen if the person clever enough to craft the idea would spend more time on packaging it to be accepted by others. Unfortunately people expect others to recognize the truth as-is while people that are selling lies know how to sugar coat them,
The thing the didn't mention, and few people do, was the part the Federal Reserve had in this. After the dot com bust and 9/11, the Federal Reserve began lowering the reserve rate. At the beginning of 2001 it was at 5.98, by the end of 2003 it had been regularly lowered and stood at 1.
In determining your house payments, interest rates are more important than the price of the house. This lowering of interest rates allowed much higher prices at the same monthly payment and the market started to heat up. At this point almost any stupid deal paid off. You could pay 10% more than the house was worth and sell it at a profit in a year. And many were doing that, or pulling the 'equity' out to buy stuff. This 'equity' was money that was only based on the price of the house which was based on the interest rates making loans affordable.
In mid 2004, the Fed started raising rates once again and by mid 2006 hit 5 1/4 %. This, of course, meant that the same monthly payment would no longer support as large of a loan. This priced many people out of the market or forced them into lower price homes. The market softened and people trying to unload houses they had bought that they couldn't afford to keep at a profit, something they could have done the previous year, could no longer sell. And the bubble began to burst.
The Fed started correcting this in August of 2007 but at this point it was too late. The crash was beginning. Lowering the rate didn't change the market psychology because too many people were under water.
Those of us who presume to understand the myriad of ways that someone, desirous of the unearned, can do so when the universal measure of the earned is corrupted, will always be disappointed when ignorance of such things "explain" events in non-essentials.
Yaron Brook's talks are filled with humor and real world examples. In Q&A he can back up his statements with data that would put his audience to sleep if it were the basis of his speech. I have heard people ask him why there aren't more people like him spreading Objectivism and to me the answer is that he is a teacher. A good teacher has to guide a student to learning, not just provide him the truth and have them accept it. Most really smart people don't have the patience to lead us less endowed to learning and we don't listen or adapt ideas that are false but easier to swallow.