I recently saw a few of minutes of the Late Show with Stephen Colbert. The little I saw is the most I have seen of the show since Colbert took over.
His guest was Steve Carell, who gained a lot of fame for his lead role in The 40 Year-Old Virgin. Carell more recently starred in The Big Short, which is a movie about the 2008/ 2009 financial crisis. You could say that the movie is based on a true story.
In his interview with Colbert, Carell talks about the fact that there were a few people who saw the major economic crisis coming and made a lot of money from it. He talked about one character who saw the housing bubble and predicted that a lot of these loans were going to default.
Carell stated, “They essentially bet against the U.S. economy.” He says, “Who are the heroes here? Because, you kind of root for them, but at the same time, it’s at the same time at the expense of everyone else in America.”
Steve Carell is an actor and not an economist, so don’t take this as harsh criticism against him. But I think his remarks need some clarifying. He is sort of right on the one hand, but the way he said it, it is also misleading.
The few people who bet against the U.S. economy did not really gain at the expense of the rest of America. They certainly did make a lot of money by predicting the downturn, but let’s be clear that the people who went short did not cause any of it.
If you sell a stock because you think it is going to go down, then you exchange money with the buyer of your stock. If the stock actually goes down, you could say you gained at the expense of the buyer. But this is really difficult to say. The buyer probably would have still bought the stock from someone else. Maybe you gained at the expense of someone else who was only willing to sell the stock at a fraction of a cent higher.
It gets very complicated here. In a sense, the stock market is a zero sum game between the buyers and sellers. Actually, it is less than zero sum because of the commissions being paid to the brokers. But the money changing hands at any given time is zero sum.
Of course, the stock market itself is not zero sum. There are dividend payouts and capital gains. The broad stock market in the U.S. is far higher today than it was 40 years ago.
There are always buyers and sellers. And it is a zero sum game in a certain sense, even with new money entering the market. But this capital directs investments and sends signals to the marketplace.
Sometimes it is easier to think about something like the oil market. There are buyers and sellers here. Just think about the futures market, where some people lose at the expense of others. But all of this “betting” drives economic activity. It sends signals to suppliers and consumers on whether to produce more or less and whether to consume more or less, at least on the margin.
The few people who bet against the U.S. economy in 2008, if anything, actually helped the situation. If those people hadn’t existed, then the boom may have lasted a little bit longer and gone a little bit higher. In other words, as hard as it seems to believe, the crash could have actually been even worse.
If nobody ever bet against the stock market (let’s say there was no short selling or futures market), then only stock selling could drive stock prices down. Is just selling a stock considered bad? Somebody always has to be selling for another person to buy. Prices will move based on the number of buyers and sellers at a given price.
The few people who were short selling in 2008 gained at the expense of others only in a very convoluted way. If anything, these people helped the market overall, as they were the only ones trying to drive prices to their “correct” value.
And we have to be absolutely clear that short sellers do not typically cause crashes any more than opening an umbrella causes it to rain. The short sellers are generally reacting to the situation they see. They may or may not be correct.
I haven’t seen The Big Short. I know that some libertarians are excited about the movie. But it is not a libertarian movie, which is evident by the big name Hollywood actors in the movie. You aren’t going to see a story about the Federal Reserve blowing up a bubble and the subsequent bust, as all part of the Austrian Business Cycle Theory.
Without even seeing the movie, I can tell you that there are going to be some economic fallacies in The Big Short. Still, there will be some valid points too and I think some libertarians and those interested in economics will find it interesting.
Maybe one day we will get a libertarian movie based on the true story of Alan Greenspan, Ben Bernanke, and Janet Yellen.