Exploratory Essay Based on the Documentary Inside Job
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ExploratoryEssay Based on the Documentary Inside Job
The movie documentary Inside Job provides an analysis of the2008 financial catastrophe, and puts it in a more comprehensible way.Narrated by Matt Damon and directed by Charles Ferguson, thisdocumentary investigates the source of this financial crisis, thedreadful corruption in the America’s political and financialinstitutions, as well as the influence of corruption on the economiesof the world (Frost 2). The 2008 economic crisis was termed as thesecond largest since the industrialized western countries were hit bythe most severe and longest great depression. As a result, thisfinancial collapse led to the housing bubble, economic recession, andalso loss of job and bankruptcy for many people (Dzikevicius et al.347). Interviews and research from various sources such aspoliticians, financial analysts, professors, as well as politiciansraise interesting ideas such as what led to the real estate bubbleand the position of this bubble in the 2008 economic crisis? A largerquestion displayed by this documentary involves the extent at whichthe America’s political system is related to economic problems?
The Role ofthe Real Estate Bubble on the Economic Crisis
The downturn that was experienced in 2008 is a complete image of theeffect that the real estate market together with discourteousinvesting might have on a country’s economies. According toKirshner (19), the real estate market increase in popularity made itto become a difficult and hard system to control. Consequently, itbecame prone to economic shocks. Some of the factors that led to the2008 real estate bubble included issuance of subprime mortgages bythe financial institutions. People were able to access a housing loaneven with an impaired credit history or low credit scores. Therefore,not all were able to repay the loans (Gaber et al. 24). Later, themortgage industry became highly competitive leading to relaxedstandards for mortgages. Lenders who lowered their standards had thebenefit of gaining the market share. In this documentary, Ferguson(Inside Job) suggested that lenders were left with only two options,to either lose market or lower their mortgage standards. Relaxedmortgage standards were also as a result of securitization of homemortgages that increased day by day .Ferguson (Inside Job) agreesthat the false appraisal of the Collateralized debt obligation astriple A and selling them to unsuspecting investors also led to the2008 financial crisis. Moody, Standard & poor, and Fitch are someof the rating agencies that did not categorize subprime securitiesinto investment grade (Dzikevicius et al. 349). Sometimes, thesecompanies were given money by issuers to adjudge the securities.Issuance of unregulated credit default swaps by major banks tolenders also exacerbated the economic crisis during the housingbubble peak years. Ferguson (inside Job) stated that banks used thisopportunity to leverage themselves by offering CDSs that were farmore than their capital for longer term profits or survival.
The real estate bubble intensified the 2008 financial crisis. Itcontributed to not only increased huge profits and yearly cashbonuses in Wall Street, but also it created lots of wealth fortraders and CEO’s of various companies. According to Frost (23),this type of profits or income was not real because it was from asystem that had flooded the economic system. Moreover, during thereal estate bubble, house prices rose at a faster rate but afterwardsescalated. Consequently, default rates increased extremely in thesubprime market and home owners became prone to losing their homes.An increase in defaults especially in the subprime market has aninfluence on the financial markets since it creates credit squeezesthat lower investor’s confidence (Gaber et al. 25). The collapse ofthe housing market also creates big losses for banks. These banks arelikely to become insolvent, therefore imposing some risks to thesecondary mortgage market.
EconomicCrisis is Attributable to Deregulation
One area that interests researchers is whether removal ofgovernmental regulations from economic practices could have an impacton the severity of the crisis. Gaber et al. (26) observed that bothfederal and state regulatory agencies did not make any effort tocounteract abuses in securization, issuing as well as in MBSrepackaging. Ferguson (Inside Job) argued that subprime marketexplosion was an enough indicator to show that the mortgage marketwas experiencing some difficulties. In 2005, the mortgage marketsubprime share increased to more than twenty percent from less thannine percent in percent in 2003. Krishner (34) stated that thistremendous growth during a time of low wages and lack of jobs shouldhave alerted the regulators about the future crisis. For instance,the presence of regulation could have helped in the smooth running ofthe market. For instance, Goldman Sachs’ CEO, Henry Paulsonassisted in lobbying the Securities and Exchange Commission with theaim of relaxing leverage limits. As a result, banks got anopportunity to increase their borrowing. Therefore, the source offinancial crisis can be attributed to deregulation.
TheRelationship between Economic Problems and the Political System
Researchers have always been concerned about the contribution of thepolitical system to economic problems. Ferguson (Inside Job) observedthat politicians and bankers had formed an association since 1980,which used to control almost all the approvals of merger of banks onthe Community Reinvestment Act. Both republican and democrat’spoliticians forced financial institutions to issue loans to borrowerswhose credit worthiness was in question. Frost (39) stated that theWall Street activities are governed by the same people who holdpositions in the government. Therefore, the financial institutionswork conjointly with the government. When institutional investors andbanks were busy assimilating the risks of providing loans toun-creditworthy clients, politicians on the other hand, played a roleof ensuring that the American dream concerning homeownershipexpanded. Gaber et al. (26) related the 2008 economic crisis wascaused by terrible politics and government policies. For instance,the root cause of the downturn can be traced back to federalpolicies, which were developed to promote home mortgages.
ImportantSteps in Addressing Economic Problems
The most important steps to get the American economy on trackinvolves preventing overregulation and deregulation, tax reform,training, as well as education. Overregulation leads losses in costand productivity (Frost 45). Deregulation on the other handcontributes to asset bubbles, which burst to create recessions andcrises. Therefore, rules and regulations in the economic industryshould be done in moderation to avoid financial challenges in thefuture. Tax reform should allow for corporate tax rate reduction.Reduction in this tax would lead to an increase in businesses output,which in return would create jobs and create more resources forcompanies to invest not only in capital expenditures, but also inresearch and development. Jobs creation is a vital step in revivingan economy but it needs qualified skills. Therefore, the governmentshould invest heavily on technology, science, as well as in technicalskill development to produce skilled workers.
In conclusion, the Inside Job documentary is a good referenceto addressing economic crisis since it gives essential componentssuch as deregulation, securization, housing bubble burst, as well asgovernmental policies that had an impact on the economy leading to aserious global financial meltdown in 2008. This documentary presentsissues that are relevant today and it creates public awareness of theneed for reform in the nation’s financial system.
Dzikevičius,Audrius, Lukas Kazlauskas, and Šarūnas Bruzgė. "Evaluation offactors leading to formation of price-bubbles in the real estatemarket of Lithuania." Verslas: Teorija ir Praktika 16.4(2015): 345-52. Web.
Ferguson,Charles, director. Inside Job. Sony Pictures, 2010.
Frost, Gerald.Understanding the Crash: The Financial Crisis of 2008: Causes,Consequences, Cures. Danube Institute, 2014.
Gaber, Vasilka,Stevan Gaber, and Ilija Gruevski. "The American real estatebubble – Trigger for the biggest financial crisis in the lastcentury." Perspectives of Innovations, Economics andBusiness 14.1 (2014): 21-27. Web.
Kirshner,Jonathan. American Power after the financial Crisis. CornellUniversity Press, 2014.
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