Frontline has a new special out called “Money, Power and Wall Street” that takes a look at the financial crisis. I watched part one. It is definitely educational, and I highly recommend watching it, but with a caveat: there is a heavy propaganda message in this documentary, and it should be viewed with that foreknowledge.
The program focuses on the role of the banks in issuing loans to people who really had no business borrowing money because they were a high credit risk. But the banks were willing to take on those risks because they could bundle loans together and sell them off to other banks, and banks that bought up these subprime mortgage-backed securities could in turn basically buy “insurance” on those loans through credit default swaps, in which still other banks took on the risk by promising for a fee to take on the debt if it went sour. So all the banks were just playing a big shell game, or hot potato, passing off the risk to one another.
The show informs viewers that the problem came when the housing bubble burst, home prices started falling, and people started to not be able to pay off their mortgages. The trouble is the program focuses on how the sharks had a feeding frenzy driven by the housing boom, but it blames the financial crisis not on that bubble, but on the banks who tried to profit from it. So it is really focusing on symptoms rather than causes. What caused the housing bubble in the first place? The program completely ignores that question.
The answer is that the Federal Reserve, through its inflationary monetary policy, and the U.S. government, through its policy of encouraging homeownership, caused the housing bubble. But this program deflects attention away from the role of the government and essentially flips it on its head, characterizing government as the “good guy” standing up to the evil, greedy Wall Street bankers. Yes, the latter part of that characterization is accurate enough, but the former is a complete fraud. That statist message is the propaganda aspect of this film. Coming from PBS, this central theme of how we need the government to save us shouldn’t be surprising.
The Federal Reserve is only mentioned once in the entire program, and that is where they characterize Alan Greenspan as a “libertarian” defender of the “free market”, and the only criticism offered of him as Chairman of the Fed is that he argued against regulations of such instruments as credit default swaps (the “insurance” on mortgage-backed securities banks were dealing with). Again, this goes to focusing on the symptoms and ignoring the cause. How can the head of a central bank that has a government-enforced total monopoly on the supply of money and credit who artificially manipulated interest rates downward from where they would be if determined by the market, thereby creating an artificial boom in housing that guys like Ron Paul were warning would eventually burst and result in a global financial crisis, be called a “libertarian” defender of the “free market”. The Fed system itself is anathema to the idea of a free market economic system.
For Ron Paul’s prescient warnings, read my book, Ron Paul vs. Paul Krugman.
Similarly, the program features Timothy Geithner, the head of the Federal Reserve Bank of New York, but focuses on him in kind of a passive way as the smart guy who would become Obama’s Treasury Secretary, completely whitewashing his role in helping to create the financial crisis, such as the FRBNY producing a report in December 2004 denying the existence of the housing bubble the Fed was blowing up.
There is a theme in the program that the banks took on all this incredible amount of risk because they just believed that housing prices would go on climbing forever, or at least never come down, or that they thought spreading the risk by bundling mortgages into securities or engaging in credit default swaps reduced their own risk, etc.
This argument is totally inadequate at best. It ignores the fact that an implicit promise of Fed and government bailouts had already been institutionalized. Why not have a field day and take on risks that could bring huge rewards if it was known that if things went sour, the Fed would be there to act as “lender of last resort” and infuse them with newly created dollars or the government would be there to bail them out with taxpayers’ money?
And the program itself provides an example putting the lie to the argument that the banks just didn’t understand the risks they were taking on: Goldman Sachs was selling derivatives to customers while at the same time betting against those same toxic assets so as to be able to profit once the music stopped.
Basically, while this is definitively a very informative documentary, and I highly recommend it, be aware that it is whitewashes the government’s role in creating the financial crisis with the propaganda message that we need the government to save us from by slaying this mythical monster called the “free market”.
I’ll have comments on the other three parts in the program, so stay tuned…