“the big short” and the most ironic quote misattribution ever

I really enjoyed The Big Short. It’s totally entertaining, and captures some hard to explain and very interesting dynamics in the lead-up to the housing crisis and the eventual bursting of the bubble. That said, the movie had some significant issues. For example, it overstates how few people saw the crash coming. Many people were aware of the housing bubble, but only a few were able to figure out how to make money off of it – and just had bad it was going to get. Michael Grunwald has a new piece that does a nice job pointing to three other problems: the movie overstates the importance of complex derivatives, understates the role of stupidity vs. evil, and downplays the significance of post-crisis reforms.

These are all good points, though not completely without controversy. I think an economic sociology class that spent several weeks on the crisis could usefully watch this movie and read some of the criticisms and have a very healthy discussion of crises, responsibility, and how we narrate the past (and maybe maybe throw in a discussion of sexism in both the financial industry and in Hollywood).

All of that’s really just setup though, to my biggest pet peeve about the movie. The Big Short opens with an epigraph:

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

Here’s the thing: there’s no evidence Mark Twain ever said or wrote those words. The Quote Investigator tackled variations on this quote and determined that the modern version comes from an encyclopedia of humor by Josh Billings written in 1874. The first attribution to Twain comes as early as 1899, but again, there’s no evidence that Twain actually said or wrote those words. Normally, a little Twain misattribution wouldn’t bug me but the quote is literally about the dangers of thinking you know something that actually isn’t true. What delicious irony!

Edit: I should probably say what my most serious criticism of the film was, since it’s not in Grunwald. What the movie misses is that the “shorts” didn’t just profit off the crisis, they actively made it worse. Here’s one version of that argument, via Naked Capitalism: “The subprime market would have died a much earlier, much less costly death absent the actions of the men Lewis celebrates. They didn’t simply keep the market going well past its sell-by date, they were the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages.” In the movie, a few of the actors are conflicted, but only over the morality of making money off of someone else’s economic woes – there is no sense that their actions actually worsened the crisis. But that seems to have been the case.

 

Author: Dan Hirschman

I am a sociologist interested in the use of numbers in organizations, markets, and policy. For more info, see here.

7 thoughts on ““the big short” and the most ironic quote misattribution ever”

  1. Thanks. I read the book and saw the movie, but had not read up on the argument that the “short’ made the problem worse. It makes sense. And it is a good movie in the entertainment sense. It rounded out our trifecta of “going short” holiday films: Switching Places, Margin Call and The Big Short.

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  2. That makes no sense; shorting mortgages did not allow more mortgages to be issued, it just allowed for the shorters’ counterparties to take bets on the mortgages’ success.

    US government policy, and the savings glut in developing countries, allowed for an enormous supply of loanable funds which inexorably found a way to be lent; Wall Street facilitated that process and profited off it, made opaque a process that if transparent would be susceptible to more public recrimination, allowed the recklessness of borrowers and lenders to run its feverish course to their own enrichment but Wall Street did not originate it. Lenders like Countrywide weren’t isolated rogues- they were the financial entities most connected to the Feds, most eager to carry out GWB (and Clinton before him)’s stated desire to greatly expand homeownership.

    Read GWB’s 2002 speech on expanding homeownership:
    http://georgewbush-whitehouse.archives.gov/news/releases/2002/10/20021015-7.html

    Read Countrywide’s determination to expand lending by 1 Trillion to low-income and minority borrowers in 2005:
    http://www.prnewswire.com/news-releases/countrywide-expands-commitment-to-1-trillion-in-home-loans-to-minority-and-lower-income-borrowers-54027497.html

    The shorters were the only ones making public, costly, credible bets against this process. Blaming them is just perverse.

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  3. Mike Konczal has an interesting response to Grunwald’s piece here. Konczal argues, smartly, that the Big Short at really best at helping understood the Housing Bubble and not the financial crisis itself, and reading it in that light sharpens its strengths and dulls its weaknesses. I’m mostly convinced (except about the part where it doesn’t give quite enough credit to other actors who saw the bubble).

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  4. If the shorts took advantage of complex derivatives to bet against & extend the life of the subprime bubble and deepened the damage of the collapse, then why is the importance of complex derivatives overstated?

    Further, as Konczal discusses, the losses were concentrated in the derivative financial instruments, rather than the more vanilla ones. It seems like the Magnetar trade and similar issues have been understated rather than overstated, especially once you acknowledge (as Konczal does) that this was a supply side issue.

    I should add that I’ve read the book, but no seen the movie.

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  5. Walker nails a point that I tried (unsuccessfully) to write: the two criticisms of The Big Short that you cite in the main post can’t actually fit together. Either the complexity of collateralized debt obligations were complex enough that evil people made money by having the resources to short the position (a la Yves Smith) or the short positions didn’t matter and what did was over-leveraged trading (a la Grunwald). It’s impossible for both of these things to be simultaneously the main cause.

    I also find Smith’s take unconvincing for another reason. The happy band of pessimists depicted in the Big Short were bit players in a global drama. They anticipated the market and made a large sum of money. If the Eismans of the world were the only counterparties (people who took the position that the collateralized debt obligations were junk), then demand would have been insufficient to move the market much one way or the other.

    The real villains in this mess are John Paulson, Magnetar, and — especially — Goldman Sachs. They literally made the markets where these were traded and had sufficient purchasing power to move those markets. Goldman, especially, was actively marketing CDOs they knew to be bad while investing the majority of their money on the short side of the products they were selling. It requires parsing very, very thin hairs for them to argue that their practices did not amount to fraud (which they basically just did, not to mention the other 17 financial institutions accused of fraud.)

    I’m actually surprised that sociologists have not attempted to study the financial decision-making that led to the Great Recession in more detail. Bethany McLean and Joe Nocera’s All the Devils are Here paints a picture of institutional failure at large financial institutions. It makes a pretty compelling sociological case for the influence of firm politics leading to financial ruin, not just of those firms but of the entire global financial system. CEO incentives aligned with immediate profits and only nominally controlling sprawling organizations became a potent mix that downplayed voices within those very firms warning about the problems in the residential mortgage business (and the derivatives based on those mortgages). One way to look at the crisis was an organizational failing rather than an economic one. I think that sociologists have a lot to offer in that regard in addition to the work focusing on the effects of the Great Recession (analysis which I think our discipline has done a good job at).

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