The movie, The Big Short, has already been nominated for four Golden Globe awards and it will certainly win an Academy Award or two.

But how accurate is The Big Short? Did it correctly lay out the root causes of the Great Housing Bubble and the Great Recession or did the movie take a lot of poetic economic license?

To find out, I interviewed Anthony Sanders, Distinguished Professor of Finance in the School of Management at George Mason University. He previously taught at University of Chicago (Graduate School of Business) and The Ohio State University (Fisher College of Business). He served as Director and Head of Asset-backed and Mortgage-backed Securities Research at Deutsche Bank in New York City.

Dr. Sanders has a blog popular among economists and real estate geeks called “Confounded Interest”.

Dr. Sanders discusses the reasons given in the movie, The Big Short, and other popular explanations for the Great Real Estate Bubble.

  • Mortgage backed securities and collateral debt obligations
  • Corruption at the bond rating agencies
  • Regulators who were too close to the banks
  • Fed interest rate policy
  • Repeal of the Glass Steagall Act

Dr. Sanders explains what really caused the Great Real Estate Bubble and the Great Recession.

More from Dr. Sanders

What “The Big Short” Left Out in One Picture (Hint: The Federal Reserve and ARMs)

“Back in June 2004, The Federal Reserve began to frantically raise the Fed Funds Target Rate from 1% until it peaked in June 2006 at 5.25%… Hence, the 3/1 ARM rate rose from 3.15% in March 2004 to 5.84% in June 2006, a 270 basis point increase.”

The Big Short - Fed


The Big Short and the Era of Regulation (Dodd-Frank and Consumer “Protection”)

“Essentially, banks (under control of The Federal Reserve) can no longer originate subprime loans to consumers… Banks can no longer originate exotic ARMs like pick-a-pay or NINJA (no income, no job) loans. Lenders must now show that the borrower has the ability to repay the loan (rather than just saying ‘Yup, I sure can!’).”

bigshortreg


Paramount’s “The Big Short” in Pictures: Lehman, Bear, and Credit Default Swaps (CDS)

bigshortffff-1


National Homeownership Strategy

Note from John. The homeownership rate in the U.S. fell 1 percentage point from 64.7% when the National Homeownership Strategy was adopted in 1995 to 63.7% today. Worst of all, the volatility of home values absolutely skyrocketed. By blindly promoting homeownership, they destroyed a lot of wealth, especially among low income homeowners. The goal should have been maximizing long-term wealth creation among low and moderate income families, not maximizing homeownership at all costs.

I don’t see how the National Homeownership Strategy could have been a bigger failure.

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