The Big Short: Understanding The 2008 Crisis

Hey guys! Let's dive into The Big Short, a movie that brilliantly explains the 2008 financial crisis. This flick isn't just entertaining; it's a powerful educational tool that breaks down complex financial instruments and the systemic failures that led to one of the worst economic disasters in recent history. We're going to explore why this movie resonates so much, what it gets right (and where it takes liberties), and how you can use it to better understand the world of finance. Ready? Let’s get started!

What is "The Big Short" about?

The Big Short is a biographical comedy-drama film released in 2015, directed by Adam McKay. It's based on the 2010 non-fiction book of the same name by Michael Lewis. The film chronicles the story of several eccentric investors who predicted the collapse of the U.S. housing market in the mid-2000s. Instead of just sitting back, they decided to bet against the market, a move known as "shorting" – hence the title. These guys weren't Wall Street insiders; they were outsiders who saw what the big banks and rating agencies either ignored or deliberately overlooked: the housing market was a house of cards built on subprime mortgages and complex financial instruments like collateralized debt obligations (CDOs).

The core narrative follows several main characters:

• Michael Burry (Christian Bale): A hedge fund manager with Asperger's syndrome who is among the first to discover the instability of the housing market. He invents credit default swaps to bet against mortgage-backed securities.
• Mark Baum (Steve Carell): A highly moral and perpetually angry hedge fund manager who is deeply affected by injustice. He and his team investigate the housing market and become convinced of its impending collapse.
• Jared Vennett (Ryan Gosling): A Deutsche Bank salesman who recognizes Burry's insight and seeks out other investors to capitalize on the situation.
• Charlie Geller (Jeremy Strong) and Jamie Shipley (Finn Wittrock): Two young investors who run a small hedge fund and, with Vennett's help, get a seat at the table to bet against the housing market.

The genius of The Big Short lies in its ability to make complex financial concepts understandable to a general audience. The movie uses creative techniques, like celebrity cameos (Margot Robbie explaining mortgage-backed securities in a bathtub, Selena Gomez explaining CDOs at a blackjack table), to break down complicated terms and ideas. This approach not only educates viewers but also keeps them engaged, making the film both informative and entertaining.

Why The Big Short Resonates

The Big Short resonates because it’s a story of underdogs versus the establishment. It portrays a group of outsiders who saw what the so-called experts missed, and it exposes the greed and corruption that fueled the 2008 financial crisis. People connect with the film because it feels like a David-versus-Goliath tale, where a few individuals dared to challenge the powerful institutions of Wall Street. The film expertly highlights the human element behind the financial jargon, making the crisis relatable and understandable.

One of the main reasons the movie strikes a chord is its depiction of systemic failure. The film doesn’t just blame a few bad apples; it shows how the entire system – from banks to rating agencies to government regulators – was complicit in creating the crisis. This broader critique of the financial system resonates with many who feel that the system is rigged against them. The movie suggests that the pursuit of profit at all costs can lead to disastrous consequences, a theme that is unfortunately timeless.

Moreover, The Big Short doesn’t shy away from showing the human cost of the crisis. It portrays the devastating impact on ordinary people who lost their homes, their jobs, and their savings. This human element adds emotional weight to the film, making the financial jargon and complex transactions feel more real and impactful. By focusing on the real-world consequences of the crisis, the movie avoids becoming a dry, academic lecture and instead becomes a compelling and emotional narrative.

Accuracy vs. Dramatic License

While The Big Short is based on real events and people, it’s important to remember that it is still a movie, not a documentary. This means that certain aspects of the story were altered or embellished for dramatic effect. Understanding the line between accuracy and dramatic license is crucial to getting the most out of the film.

Here are some areas where the film takes creative liberties:

• Character Portrayals: The characters in the film are based on real people, but their personalities and actions are often exaggerated for dramatic effect. For example, Mark Baum (based on Steve Eisman) is portrayed as a perpetually angry and morally righteous crusader. While Eisman certainly had strong opinions, the film amplifies these traits to create a more compelling character.
• Timeline Compression: The film condenses the timeline of events to keep the story moving. In reality, the process of discovering the flaws in the housing market and betting against it took place over several years. The movie compresses this timeline to create a more immediate sense of urgency.
• Simplified Explanations: As mentioned earlier, the film uses creative techniques to explain complex financial concepts. While these explanations are helpful for a general audience, they are necessarily simplified and may not capture all the nuances of the underlying financial instruments.

However, the film also gets many things right:

• Core Events: The fundamental events depicted in the film, such as the discovery of the flaws in mortgage-backed securities and the failure of rating agencies to accurately assess risk, are all based on real events.
• Key Players: The main characters in the film are based on real people who played significant roles in predicting and profiting from the crisis.
• Systemic Issues: The film accurately portrays the systemic issues that contributed to the crisis, such as the lack of regulation, the greed of Wall Street, and the complexity of financial instruments.

Overall, The Big Short strikes a good balance between accuracy and entertainment. It provides a compelling and informative account of the 2008 financial crisis while also taking some creative liberties to enhance the storytelling. As long as you’re aware of these liberties, you can use the film as a valuable tool for understanding the crisis.

Lessons from The Big Short

So, what can we learn from The Big Short? Here are a few key takeaways:

• Do Your Own Research: One of the main themes of the film is the importance of doing your own research and not blindly trusting the experts. The protagonists in The Big Short were able to see what others missed because they took the time to dig into the details and understand the underlying risks.
• Question Authority: The film encourages viewers to question authority and not accept conventional wisdom at face value. The characters in The Big Short challenged the established norms of Wall Street and were ultimately proven right.
• Understand Complexity: The 2008 financial crisis was caused in part by the complexity of financial instruments. The Big Short highlights the importance of understanding these complexities and not investing in things you don’t understand.
• Be Aware of Systemic Risk: The film shows how the interconnectedness of the financial system can create systemic risk. When one part of the system fails, it can have a cascading effect on the entire economy.
• The Importance of Regulation: The Big Short underscores the importance of regulation in preventing financial crises. The lack of regulation in the lead-up to the 2008 crisis allowed reckless behavior to go unchecked, leading to disastrous consequences.

How to Use The Big Short for Learning

The Big Short is more than just a movie; it's a learning tool. Here’s how you can use it to deepen your understanding of finance and economics:

1. Watch with a Critical Eye: As you watch the film, pay attention to the financial concepts and terminology. Don’t be afraid to pause and look up anything you don’t understand.
2. Read the Book: If you want a more in-depth understanding of the events depicted in the film, read Michael Lewis’s book, The Big Short. The book provides more detail and context than the movie.
3. Do Additional Research: Use the film as a starting point for further research. Explore the topics and concepts that interest you, and read articles and books by experts in the field.
4. Discuss with Others: Talk about the film with friends, family, or colleagues. Discussing the film with others can help you better understand the concepts and consider different perspectives.
5. Follow Current Events: Stay up-to-date on current events in the financial world. The lessons of The Big Short are still relevant today, and understanding the film can help you better understand the news.

Conclusion

The Big Short is a powerful and engaging film that offers valuable insights into the 2008 financial crisis. While it takes some creative liberties, it accurately portrays the core events and systemic issues that led to the crisis. By watching the film with a critical eye and doing additional research, you can use it as a valuable tool for understanding finance and economics. So, grab some popcorn, settle in, and get ready to learn – and maybe even get a little angry – about the events that shaped our world.

And remember, stay curious and keep questioning! You never know what you might discover.