I recently had a chance to interview newly minted Academy Award winner Charles Ferguson, director of the Best Documentary winner Inside Job. Ferguson revealed his opinions about Wall Street and the causes of the most recent crisis …
Wall St. Watchdog: Your overarching thesis is that between the aftermath of the Great Depression and the 1980s there were no financial crises. But, I am not sure that is true. The world saw a stock market crash in 1973-74 after the collapse of Bretton Woods, there was a banking crisis in Great Britain in 1973-75, as well as the 1973 OPEC embargo. All of these had malign effects on the world economy. Further, the 1960s and 1970s saw the rise of the so-called “nifty-fifty” stocks int he US. So I’m not sure that I agree with the contention that the world faced no financial crises between the time of FDR’s presidency and Reagan’s.
Charles Ferguson: Well, first, I would challenge your argument that these were financial crises. The United States didn’t have financial crises. The OPEC oil shock shouldn’t be called a financial crisis–the stability of the financial system was not at stake. The 1987 stock market crash, the S&L crisis, and the junk bond market were the first time the government had to intervene in a major way. None of that happened in the 1970s.
There can be a shock to the real economy, and that can cause a financial crisis in which the stability of the financial system is at risk, but that did not happen in the 1970s, and it hasn’t happened since.
Wall St. Watchdog: You state that the failure of regulators to adequately regulate the financial markets is a proximate cause of the financial crisis. What do you say to the argument that the government fails to pay its regulators market-clearing rates, and so fails to attract the so-called “best and brightest” who are attracted to Wall St. pay packages?
Charles Ferguson: I think that there’s some merit to that argument. It’s easy to overstate the importance of the argument. When I interviewed the Prime Minister of Singapore, he mentioned that his senior regulators are paid upwards of one million dollars per year. His point wasn’t that you can’t attract high quality people, but independent of pay, you want people to be honest. You don’t want to favor the industry they are regulating and then have the regulators move on to a job in the industry. You want people whose independence is not in question and who are not influenced by corruption.
Wall St. Watchdog: Imagine that you rule the world. What changes would you make to the US financial system in order to prevent future crises?
Charles Ferguson: Let’s start with the usual list. There have been various proposals about how to fix the ratings system. Fixing banking compensation is important. I give some credence to the argument that banking has become too concentrated. There’s some merit to it. Some of the larger banks should be broken up on stability grounds and antitrust grounds. Citigroup, JP Morgan, possibly Bank of America, possibly Goldman Sachs. Law enforcement is important. It’s astonishing and very dangerous that nobody has been prosecuted. There were and are some loopholes that made some of these things “legal” but that’s not the main event. It’s clear that there was an enormous amount of fraud. And then of course derivatives, they should be tightly regulated. Derivatives should be traded on a clearinghouse, and the majority of them should be exchange-traded and standardized, and non-standardized, naked derivatives should be extremely hard to use, and certainly there should be very strong restrictions, or an outright ban, on profiting from derivatives based on securities you’re selling.
Wall St. Watchdog: To what extent do you think the US government’s explicit endorsement of homeownership contributed to the financial crisis?
Charles Ferguson: It played a role. I don’t think it was the main event. One has to be a little careful about what’s going on and how to characterize what is going on. There’s this ideologically conservative argument that one cause of all of this was government intervention in the form of guaranteeing the debts of Fannie and Freddie. And, it is clear there was some political pressure. It is much less clear that that had a major role in the crisis. Fannie & Freddie did the same thing as the private sector–its executives received enormous short-term cash bonuses for taking long-term risks. They purchased mortgage securities. They could borrow at low rates because of the implicit government guarantee and they purchased securities that paid high coupons. And they paid themselves lots of money until the shit hit the fan.
The Fannie and Freddie disaster is an argument for more regulation, not less. If they had been regulated as the private sector should have been regulated, this would not have happened.
Wall St. Watchdog: There has been some speculation that Matt Damon’s narration of this documentary is an indication that celebrities are dissatisfied with Obama’s performance, and, as a result, are starting to hold him to account. Do you see any truth to this claim?
Charles Ferguson: I think that many people are becoming disillusioned with Obama, and some of them are celebrities. I don’t know if the rate at which that is happening is greater or lesser in Hollywood. But many prominent supporter have become quite disillusioned with regard to the financial crisis and the economy.