The Big Short illustrates need for Glass-Steagall
Posted on January 18th, 2016

Australian Alert Service,

The new movie The Big Short, presently in cinemas, tells the story of the financial fraud and gambling mania that led to the meltdown of the global financial system in 2008. Even the heroes in the movie are gamblers—fund managers who were just smarter than the other gamblers and bet correctly that the US property market would tank and bring down the pyramid of fraudulent mortgage securities and derivatives bets that were based on that market. The Big Short accurately paints a picture of the financial system as a casino in which all of the games are rigged—from the level of get-rich-quick mortgage brokers to the thoroughly corrupt ratings agencies to the bank managers who knowingly sold worthless investments to their clients. And nobody went to jail for any of this.

The movie ends when the banks were bailed out in October 2008, when it became obvious that the mortgage securities that brought down Lehman Brothers were actually just the smaller detonator of the much bigger market in derivatives side-bets on whether those mortgages would fail, called credit default swaps, which threatened to bring down all banks. For those who watch it, know this: aside from some window-dressing pretend reform, such as Dodd-Frank in the US and “ring-fencing” in the UK, essentially nothing has changed in the banking system; the banks are still too-big-to-fail, and thus able to hold to ransom the jobs, savings, businesses, services etc. of billions of people in the real economy. However, now when their gambling blows up, the first action to prop them up won’t be government bail-outs, but creditor—including depositor—”bail-ins”: their innocent, unsuspecting customers who’ve entrusted their hard-earned savings with those banks will lose their money, just so a bankrupt bank does not renege on its derivatives bets with other banks.

The CEC published a lengthy movie review of The Big Short in the current issue of the Australian Alert Service magazine, which also features a detailed analysis of the bail-in regime that is now in force across the EU and US, and effectively operational in Australia. The movie illustrates for the lay person what the CEC and others already knew—without a full Glass-Steagall separation of banking that will split off all such gambling and fraud from any contact with the real economy, the system is doomed. Watch the movie and read the Australian Alert Service, and then join the fight for Glass-Steagall.

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