After confusedly watching Margin Call, I found myself realizing that I knew close to nothing about the financial crisis and its causes. Luckily, I had a reading in one of my other classes that also covered the causes of the crisis and helped shed some light on some things for me.
Jeffrey Friedman’s “A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure” attempts to describe what caused the subprime bubble to boom then bust and how it went global. Friedman uses references to other authors to prove that excess government regulations and bankers’ ignorance are the two main causes for the crisis.
Friedman blames the government for the inefficiency of the three rating agencies, the expansion of home ownership, and extremely low interest rates which all led to the housing bubble crash. It was because of government mandates that agencies were encouraged to give out mortgages to people with subprime credit. Because Moody’s, S&P, and Fitch are all granted effectively oligopoly status by the Securities and Exchange Commission in 1975, the three agencies could use outdated data and did not have to worry about accuracy when giving triple-A ratings on bonds consisting of segments of subprime mortgage-backed securities. Finally, it was the extremely low interest rates that caused banks to use ARMs to protect themselves.
Friedman spends the next half of his paper explaining that bankers invested in these mortgage-backed securities because they were fooled into thinking they could trust the ratings given by the three government-backed rating agencies. It was not their greed, as Margin Call would like to portray that led to the crisis, but the government’s overly complex web of regulations that ultimately led to our current problems.
I highly recommend reading Friedman’s article, instead of relying on this super concise summary.
Luis Alexander
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