What ‘The Big Short’ Gets Right, and Wrong, About the Housing Bubble
“The Big Short” makes a big deal of its protagonists realizing that there was a giant housing bubble in the middle of the last decade at a time no one else could see it. But that’s not quite right. When no-money-down home loans were commonplace and home prices were soaring, there was widespread discussion of the possibility that the United States was experiencing a housing bubble.
It was in August 2005 that the number of Google searches for that term hit its peak, according to Google Trends, fully two years before the crisis began. That year alone, there were 1,628 articles in major world publications included in the Nexis database that used the term “housing bubble.”
.. So plenty of people were at least discussing the possibility of a dangerous bubble. But there’s a big difference between identifying at the macro level that something is going on, and understanding the financial plumbing that would allow a person to profit from that insight.
What the characters portrayed in “The Big Short” figured out that people writing housing bubble stories didn’t was how the rot from bad mortgage loans that helped fuel the housing bubble had come to permeate supposedly safe securities. There were billions of dollars of highly rated bonds floating around that were in fact worthless, or at least worth far less than advertised.
.. But even if you were clever enough in 2005 to see all of this coming, you wouldn’t necessarily have been able to cash in as successfully as the characters in ”The Big Short.” Figuring out exactly what securities to bet against — and how and when — mattered as much as the basic insight.