Over the past 85 years, Hollywood has had much to say about financial markets and institutions – often reflecting a distinctly populist perspective. At a time when both populism and financial volatility are much in evidence, what lessons might these movies hold about regulation?
- Wall Street speculators
Start with the Wizard of Oz. The 1939 movie was a populist allegory about money, though most devotees don’t know it. The Emerald City represents Wall Street, while the yellow brick road symbolizes the gold standard. The Cowardly Lion represents William Jennings Bryan, who, when the original book was written in 1900, was an agrarian populist candidate running for president against the monetary austerity of the gold standard and on behalf of western farmers (the Scarecrow) and eastern factory workers (the Tin Man).
Fifteen years later, the 1955 film East of Eden reflected the view of speculation as sinful. Cal Trask (played by the legendary James Dean) “goes long” in beans, in anticipation of an increase in demand if the United States enters World War I. Sure enough, the price of beans skyrockets. But when Cal offers the profits to his father, he is rebuffed. The father is morally offended by his son’s actions, which he sees as profiting off of others’ misfortunes.
Cal has been the agent of Adam Smith’s famous invisible hand: By betting on his hunch about the future, he has contributed to upward pressure on the price of beans in the present, thereby increasing the supply so that more is available precisely when needed (by the British Army). The speculation is “stabilizing,” in that the increased supply will dampen the price spike.
- Financial misdeeds
Thus, there is in fact a case in favor of the famous pronouncement, “Greed, for lack of a better word, is good,” by corporate raider Gordon Gecko (played by Michael Douglas). But in that 1987 movie, Wall Street, he makes his money on insider trading. So do the protagonist commodity traders (including Eddie Murphy and Dan Akroyd) in the 1983 comedy Trading Places, the most entertaining of the lot.
In the 2013 movie, The Wolf of Wall Street, a shady stockbroker played by Leonardo di Caprio makes his money by “pump and dump” victimizing of this clients. Although the audience is expected to have a sneaking admiration/envy for these rogues, they clearly have the moral failings that worried Cal’s father. Their schemes warrant regulation to protect the general public.
- Bank runs
Runs on banks are a form of destabilizing speculation. But they need not be attributable to evil big-city bankers or financial speculators, according to two Hollywood classics. In It’s a Wonderful Life of 1946, ordinary depositors converge on the Bailey Brothers Building and Loan in small town Bedford Falls. Each demands their money back out of fear that others will do the same, depleting the institution’s reserves. Only by sacrificing his own honeymoon money does George Bailey (Jimmy Stewart) stave off failure. Some economists blame such 1930s bank crises in the US on the era’s federal prohibition against interstate banking.
In the 1964 Disney movie Mary Poppins, starring Julie Andrews as the nanny, depositors run on a London bank when one of them mishears the son asking for his tuppence, unimpressed by the bank chairman’s paean to the financing of railways and plantations across the British Empire (Dick van Dyke). The drama was inspired by real events: an anonymous letter triggered a run on deposits at Birkbeck Bank in 1910, the year in which the film was set.
We have known for some time the right sort of regulation to deal with bank runs. Government agencies ensure depositors — at least, up to some threshold — and should intervene in the event of bank failure. But to guard against moral hazard (excessive risk-taking ex ante in response to prospects of bail-out at the expense of the taxpayer), the agencies require that each bank keeps certain levels of reserves and investor capital. Such requirements intentionally constrain their profits, as a sort of ex ante insurance premium.
In the 2023 morality tale, Bank of Dave, a good-hearted businessman in the mold of George Baily tries to open a small bank in a small English town. The big London banks underhandedly try to stop him, ultimately relying on onerous capital requirement via a totally captured regulatory body. (In the movie, Dave manages to come up with the capital in the end. In real life, he did not.) The audience is unlikely to guess from this that big banks tend to lobby politically for lower capital requirements, not higher ones. The public has an interest in high capital requirements.
Many other movies are like Bank of Dave in confirming the public’s most cynical beliefs about how government actually works. In another Dave movie, in 1993, Kevin Kline plays a presidential look-alike who, while standing in at the White House, calls in an accountant friend who spends an afternoon straightening out the federal governments’ horrendous books.
Clearly, government regulation did fail, and markets did go haywire when the troubles of the US sub-prime mortgage turned into a global financial crisis in 2008. The crisis naturally provided Hollywood with a lot of inspiration, including Rollover, Margin Call, and Wall Street: Money Never Sleeps, among others.
- Short selling
In The Big Short, a few free-thinking investors in 2006-07 figure out that the US mortgages have been excessively packaged, sliced, and derivatized. There are great asides to the audience explaining financial concepts like derivatives. They “short” the market, i.e., they bet that it will implode, a bet that – with time – pays off. If you think about it, the episode illustrates the virtues of short sellers in that they give the market its come-uppance. By selling in an over-valued market, they are stabilizing speculators.
But financial market skeptics are often especially hostile to short sellers. In Dumb Money, the meme-stock-traders who bought GameStop stock in the mania of early 2021 considered themselves the good guys, who stood up to short-selling hedge funds. (At least James Dean’s Cal bet in favor of something, rather than against it!) And yet, short selling serves an important purpose, as a check on excessive market exuberance, as we learned from The Big Short. One lesson for policy is that regulators had to step in and call a halt, when meme-market stockbroker Robinhood found itself short of capital.
- Reform of financial regulation
Many politicians campaign with rhetoric appealing to popular anger at the Gordon Geckos who work in the Emerald City. Some of those politicians, once in office, follow through and try to improve regulation. Examples include recent regulatory efforts to strengthen capital requirements in the “Basel III end-game.” In the United States, they build on the post-crisis Dodd-Frank legislation of 2010, which included regular stress tests for banks and strengthened regulation of derivatives.
Meanwhile another sort of politician also engages in campaign rhetorical attacks on evil bankers and speculators; but once in office, they in fact try to block or roll back the regulatory reforms. Evidently, they figure that the voters are too dumb to know the difference. Until the next crisis hits.
