The Big Short The American Comedy Drama Film

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The Big Short
The American comedy-drama film, The Big Short, directed by Adam McKay based on Michael Lewis’ book, The Big Short: Inside the Doomsday Machine, touches on the 2007-2008 financial crisis in the United States that almost brought down the economy. The essay will touch on the financial system of America based on the film’s explanation and my personal understanding of the macroeconomic theory. Generally, the macroeconomic theory comprises of the phenomena of inflation, unemployment, output and income.
Output is the total sum of everything produced and sold in a state within a specified period of time. Income is the money generated from everything produced and sold. Hence, income and output are usually related or at times equivalent and are often interchangeable. In macroeconomics, output is measured as the Gross Domestic Product or the national accounts of a country. Unemployment is the number of people without jobs that includes those retired, those pursuing education, and those discouraged from looking for a job because of the lack of job prospects. Inflation, on the other hand, is an increase in prices of commodities in an entire economy, but when they decrease it is called deflation. The central banks that control the countries’ supply of money control these changes in prices using the monetary policy. They raise interest rates and lower the amount of money circulating in the economy in case of an inflation and lower interest rates in case of a deflation.
The film, touches on the same phenomena of inflation and deflation and output and income, but in the housing market. Michael Burry, a company manager discovers that the American housing market is not stable because of the higher risk subprime loans. He predicts the collapse of the housing market and the rise of interest rates for adjustable mortgages, plus he sees an opportunity to make a profit and he grabs it. Burry shares his idea with other investors and banks, who immediately understand and accept it. He bets against the market, specifically in the mortgage backed securities by creating a default credit swap market and in the end, his fund’s value increases and he makes great profit. Michael’s idea attracts opportunists, who see this as a chance to make money.
Furthermore, banks were giving out mortgages to people who would not be able to pay them back in the end due to their low incomes, and whom in the first place should not have even taken them on (The Big Short). However, when they heard about Michael’s idea, the banks decide to turn the I Owe You mortgages into bonds and other exotic securities and sold them off to investors, assuring them that they were safe. Unfortunately, in the end, investors realized that the so called safe investments were not so safe after all. Most of those IOUs were worthless and the mortgage securities reduced in value, causing major losses for the investors.
The film’s explanation of how the financial system of the United States and my learning of macroeconomics completely changes my view about the system of it being stable and reliable. The fact that the bank traders would sell mortgage securities under false pretenses, people betting against ord...