by Alex Pemberton
Note: the title of this piece is both clickbait (it worked, huh?) and a reference to a scene in the movie around which this piece is framed.
The Big Short is my favorite movie.
It's my favorite movie for many reasons, including but not limited to:
- the perfect casting, pacing, and cinematography
- Steve Carell's character and his ridiculous haircut/toupee, and Christian Bale's character and his glass eye
- the memorable dialogue (like during this flashback scene)
- the excellent and unexpected explainer cameos, with Anthony Bourdain (RIP) cutting fish, Selena Gomez playing blackjack with Richard Thaler, and Margot Robbie in a bathtub explaining a variety of financial instruments and behavioral economics theories
The Big Short is my favorite movie because it so perfectly encapsulates the mood -- the desperation -- of that period in our nation's history. It's my favorite movie because it was released just more than a year after I earned a degree in economics with a real estate emphasis -- an endeavor resulting from my genetic predisposition to geeking out on data, and an education which was often framed around the Great Recession. It's my favorite movie because it was released only months after James Chung provided his first wake up call to Wichita.
Mostly, it's my favorite movie because if you really watch it, you'll understand it's not just a story about the Great Recession, or the housing bubble, or the traders who saw it all coming.
If you really watch The Big Short, you'll understand that it's a story about the human condition: how people are inclined to excessive self-interest; how people are inclined to ignore inevitable danger; how people, especially the most powerful, are inclined to create mutually-reinforcing systems to mitigate consequences of their failures; and how people, especially the least powerful, are inclined to get hurt by things they don't even understand.
It's not just a story about Wall Street.
It's also a story about Wichita.
The Big Short
The Big Short follows the real-life story of three wildly different groups of Wall Street traders who each, through various means, have come to see the nation's housing market as a bubble set to burst.
The traders looked at the data and took it seriously.
Each group of traders invests heavily in a financial instrument called credit default swaps -- essentially, insurance against a decline in value of bonds secured by residential mortgages. If the value of the bonds goes down -- as would happen in a collapse of the housing market -- the credit default swaps would be worth hundreds of millions of dollars. In investing, this is known as a "short" position.
As their prediction begins to come to fruition -- with foreclosure rates skyrocketing and banks in danger -- something interesting happens.
The boosters of the mortgage securities industry continue to cheer-lead, even as mortgage lenders go bankrupt. The prices for mortgage bonds go up, even as their underlying mortgages fail. Credit ratings agencies continue to give the mortgage-backed securities the highest-possible grade. The Wall Street Journal refuses to report on the inconsistencies in the market and the corruption of its actors.
As the crisis hits, one of the traders incredulously mumbles, "There's no fucking way the big banks are that stupid." They can't believe what they are seeing, because it is so detached from the rational framework through which they see the world.
As the story unfolds, the traders learn why. The big banks were pumping up the prices of mortgage bonds until they could hedge their position. The credit ratings agencies were pumping up their grades to keep their customers from going to their competition. The media was pumping up their coverage of the economy and its players to maintain their network of sources and advertisers.
It wasn't because everyone on and around Wall Street was a terrible, evil person. Plenty of good people made very bad decisions that they thought were in their best interests. It was a prisoner's dilemma. No one intentionally tried to destroy the economy, but some were happy to exploit it and the rest were unwilling to inflict pain upon themselves to avoid it.
There were simply too many perverse incentives that ensured that the early signs of collapse were not heeded -- that what should have spurred action and change led only to double-downs and fortification.
One week ago today -- on Monday, June 11 -- James Chung of Reach Advisors came to Wichita and told us that our own catastrophe is at hand. He told us that our catastrophe is now.
I don't have the time and space here to provide a detailed recap of the data and its analysis. The long and short of it is that Wichita and its economy have flat-lined, even in the midst of the strongest national economy in decades. While our peer cities in the region have grown their economies by an average of 16% since 2010, our economy has contracted by one percent -- we've fallen 17% behind our competition. And it wasn't exactly gangbusters before that -- Wichita has been underperforming the national economy since at least the turn of the millennium.
That's not necessarily bad, right? The fact that we're not growing isn't good, but at least we're not really declining, right? We're not gaining what we could be, but at least we're not losing what we have now... right?
Yeah, sure. All of those things are true, but they're also wrong. What happens when everywhere else stops growing? What happens when the next national recession hits? What happens when the shit hits the fan and companies stop ordering airplanes?
Akron, Ohio. Detroit, Michigan. Stockton, California. That's what will happen. For each of them, the signs were clear and the signs were ignored. The rubber industry, automotive industry, and exurban sprawl industry that underpinned each of those economies all showed clear signs of imminent collapse -- and each city chose to ignore it and failed to fundamentally change.
Look at the charts from the Great Recession to now. Look how, by every measure, Wichita flat-lined or declined where the rest of the country and region recovered. Do you really think Wichita can survive another one? Wichita's decline is already old enough to buy cigarettes. One more shock means the beginning of a death spiral.
Last week, James Chung came to town again and told us that our economy just doesn't work anymore. He told us that our equivalent of the mortgages inside the AAA-rated bonds that are the foundation of our economy are actually just a bunch of shit -- and the whole jenga stack is about to come down.
Of course, our leaders have all watched The Big Short and they saw the parallels and they heard the stark data on Monday and they took it to heart and they committed to making changes based on new ideas and they decided to face our challenges head on with renewed vigor and they put forth new, innovative strategies... right?
The Cloak of Collusion
In the week since Chung's latest report, Wichita -- like Wall Street in the movie -- has gone on lock-down.
We needed clear platforms; instead we got platitudes. We needed compelling visions; instead we got avoidance.
Instead of a strong and sober response, too many of Wichita's leaders begged for credit. They threw up their hands and said we're doing all we can do. They buried their heads in the sand while patting themselves on the back. They said, "Sure, everything is crumbling around us but, hey, look at the new airport that hasn't saved us and the new college-adjacent office park that hasn't saved us and the new..."
...that hasn't saved us. If these silver bullets were capable of saving us, we'd have seen an indication of it -- even a tiny uptick -- in the data by now. We haven't.
Within the next few weeks, you'll hear of another shiny, long-promised silver bullet. It will come at the expense of significant public investments, siphoned away from other planned projects -- just as James Chung warned us not to do.
Leaders will tell you that this is the one... This is the big one. It's going to put us on the map in a big way. Development will explode around it and finally...finally we'll have arrived..
They'll tell you they're not done, that there are more silver bullets to come, and that combined with all the previous silver bullets, they will save us.
It won't. They haven't. And they won't.
One of Chung's strongest critiques is that the occasional silver-bullet project -- that Wichita so desperately believes will save us -- will not save us, and yet all our "leaders" can do, when they acknowledge the crisis at all, is point to silver bullets and beg for applause.
But I've seen The Big Short, on screen and in real life, and I know why... Self-interest. Politicians, and certain organizations, need good public perceptions to survive and keep their jobs. They're not bad people -- they're all good people who fundamentally believe that they have been doing the right thing, and that continuing to do more of it will save us. But it hasn't yet, and it won't.
As Wichita went on lock-down, local reporters presented with leads from credible sources on the failure and corruption that has kept Wichita flat have ignored it, or gone cold after reaching out. And I know why... For the same reason the stories never made it to the press when they happened -- self-interest. Just like the Wall Street Journal, our local media outlets need sources and sponsors.
As Wichita went on lock-down, the few leaders who were willing to step up and call out duplicity and failure received the calls from their fellow power brokers, reminding them to stay in line. (Don't believe me? Send me an email, and I'll send the receipts.) Perhaps the rest -- who know the truth but will not speak it aloud -- truly believe that keeping up the aura of consensus, the appearance of accord, is critical to achieving the wins we so desperately need. But they are wrong. It only enables failure and ensures its future.
Late last week, having seen the cloak of collusion fall over Wichita's powerful people, I found myself -- like that incredulous trader as the crisis hit -- bargaining with my expectations. There is no fucking way our leaders could be so stupid... so self-interested... so short-sighted. Right?
I shouldn't have expected anything else, because I'd seen this movie before. I'd seen how, when Wichitans made risky moves that ultimately paid off, their bosses and higher-ups tried to shut them down -- just like Michael Burry's investors in the movie.
I'd seen how leaders intentionally lied about the data to bolster their perception and keep the money flowing in, and how they pointed fingers in all directions to skirt accountability -- just like the blind ratings-agency employee in the movie.
I've seen this movie before, and I know how it ends.
You Need to Short Wichita
You don't need to have seen The Big Short to know how it ends.
The economy collapses. The big banks, politicians, ratings agencies, and other powerful people get away unscathed. The regular people get hurt.
The only difference is that in Wichita, the traders -- the people calling the bluffs of the powerful -- won't come away from this as millionaires by cashing in our short position. We're only doing it because we don't want to see the same ending, and we know there is still time to write a new one.
If you're not already, you need to short Wichita.
What does that mean?
For those with power, there is still the opportunity to do what the powerful chose not to do in The Big Short and have so far chosen not to do in Wichita -- stand up, and change. Stand up for what is right. Stand up for honesty, and for integrity, and for transparency, and for innovation. Don't write this off because you don't like me, or James Chung, or the data... because I've called you out and ruffled your feathers... because you think you know my motivations. How you respond to this moment will define your legacy and -- far more critically -- the fate of Wichita; don't let me define it for you, just because you want to disregard me as the messenger.
Truly take Chung's analysis to heart, and change in response. The old ways that got you to power aren't working anymore. It's time to use your power to create new ways of success. And if you can't, you need to step aside.
For those without power, your options are more limited. You can try to hold the powerful to account and force them to stand up and change. You can try to replace them if they refuse. You can try to organize and change the failures James Chung has identified without the help of leaders. But don't be surprised if it doesn't work, because the mutually-reinforcing systems supporting the status quo are strong and intentional.
How else can the regular person short a city?
If you've heard our past Yellowbrick presentations, you'll recall that cities have only two true assets: Land and People. Just like financial assets -- such as mortgage bonds -- these can either be invested in or disposed of.
You won't make millions from shorting Wichita's land, but you may be able to save yourself. If you have a big portion of your net worth tied up in your home -- a small slice of the city's Land asset -- you should strongly consider selling. If changes aren't made and the crisis hits, your home will lose value and you will suffer. The regular person, at this point in Wichita's history, should be hedging wherever and however possible.
For me, I've seen too much. I've seen too much of the self-reinforcing systems -- the cloak of collusion -- and their effectiveness, to still maintain optimism that things can change. I've been to Florida. I've given my impassioned speeches, and Wichita decided to buy more Bear Stearns.
I've decided to go all in on my short of Wichita's People asset.
I've decided to leave.