OVERDOSE The Next Finacial Crisis

I haven't seen the entire film yet, but that first part was just very limited and would lead viewers to, incorrectly, think the government support was causing the bubble.

It's ignoring the primary role that finance capital had in forming the bubble. It's theme is that the government is to blame. While they did participate, they only got into it late in the game.

Specifically, they say that Fannie Mae and Freddie Mac and sub-prime lending were the cause of the problem. That is factually incorrect.

The bubble built up due to numerous factors. The primarily contributor was the development of securitized mortgage bonds in the 1980s combined with loose monetary policy and a hands-off attitude to regulating these securities. Also, the development of CDSs to hedge against bad debt caused capital to flow even more freely into these mortgage bonds.

The oversupply of capital was what caused the bubble. That oversupply was evidenced by mortgage shops opening up in minimalls everywhere, and any yahoo off the street selling mortgages to any other yahoo.

Because these people qualified for support from the GSEs, the GSEs got into the bubble too, forming another hedge against loss.

Continued... the way in which MBS were gathered together, then re-divided into bonds of different quality (tranches), and how they were traded on MERS, was not covered in enough detail. It's technical but relevant, because it explains why mortgage bonds appeared to be low-risk. It also would help explain some problems involved in unraveling ownership of the mortgages foreclosing on homes.

(Also, Peter Schiff is really funny. If we didn't have the FDIC, people would just hold money as cash. They would not trust banks. The FDIC offloads bank regulation onto the government, which is better equipped to regulate banks than individuals ever could. Most people can barely balance their accounts and keep on top of their credit card use! He's out of touch.)

They then miss the issue of bank solvency which was the primary risk of the collapsing real estate bubble. The collapse of the too-large banks threatened the overal financial system. Even with the bailouts, the banks constricted their credit. The stimulus spending is an effort to pump money back into the economy.

What Washington won't tell us is that more of the money supply is created by the financial sector than the government. Credit, be they mortgages, car loans, or credit cards, are a form of money - and when credit is expanded, as it has been from the 1980s to the 2000s, the overall supply of money grows.

Consider a dollar bill. If you borrowed it from me, the money supply doubles. I lack a dollar, but now have an IOU the value of which depends on you. You also have a dollar, which you can use to buy a soda.

The value of that IOU depends on your employment situation.

The point of the stimulus spending is to keep people employed, so that debts could be covered. If people went bankrupt, credit would continue to contract (or contract even more).

Likewise, the prime rate is nearly 0% because they want to keep cash in the economy. If the rate rose, people would buy bonds, put money into savings, and pull money out of the economy. That would raise unemployment, and cause more contraction - before long we'd experience deflation, and then fall into a depression.

The reason for this strategy is due to Ben Bernanke, who studied the Great Depression. His theory is that the Great Depression was a Great Contraction - a contraction in the money supply due to a contraction in credit.

Incidentally, it would have been nice if they had some economists interviewed. Schiff and Celente are not economists. There are better talking heads who had a better idea of what happened and what is likely to happen in the future. Nouriel Roubini is one, and Richard Koo is another. For that matter, getting Bernanke and Krugman on to explain what's going on would have helped - except that the filmmakers are anti-mainstream economists.

The film also assumes that government debt is just like any other kind of debt, but it's not. That's a fallacy that's being spouted by the Tea Party / Ron Paul set. Government debt can be reduced or increased by changing the value of the currency and by targeting high or low rates of inflation. By increasing inflation, you can chip away at the debt. You can increase taxes and pay down the debt. This flexibility allows governments to use money to deal with the more concrete problems of unemployment, businesses and sustenance of the people.

Without a doubt, Wall Street has DC dancing like puppets. Wall Street should have been punished. But this film is out of touch with reality.

Incidentally, while there is no bailout bubble, there is a lot of pressure to cut stimulus spending, which could lead us into deflation.

That's exactly what happened in 1932. The bubble collapsed, sending the economy into a recession. Monetary policy failed, so they shifted to fiscal policy. The fiscal policy (stimulus spending) helped reduce unemployment. Political pressure to end the deficit spending increased, to the point where the government spending was curtailed.

Unemployment rose, and then we entered a deflationary spiral for a short while. Unemployment rose to 25%. The economy was battered, and climbing out of the hole took a long, long time. During this era, people who could save money learned to save it. Those who could not learned to survive on little to nothing. Fully 1/3 the population was considered poor.