I just ran across this, and had to share it. I’m reading Boomerang by Michael Lewis, about how different countries mis-handled massive amounts of credit. So I start searching items on Wiki, just to be sure that I understand what I’m reading.
Credit Default Swaps were invented by JP Morgan in 1994. They had extended Exxon a $4.8 billion dollar loan to cover the punitive damages of $5 billion resulting from the Exxon Valdiz oil spill. To cover themselves, they passed the risk to European banks. By 1997, JP Morgan had perfected CDS.
December 21, 2000, Bill Clinton signs into law the Commodities Futures Modernization Act of 2000, which “clarified” the law so that most OTC securities would not be regulated under federal securities laws (also created the Enron loophole), thus superseding the Commodity Exchange Act of 1936. So, derivatives were not subject to SEC regulation after 2000, but taxpayer money was used to bail out the banks in 2008. And OUR Democrat president opened the door…
Isn’t it interesting how an environmental disaster led to a financial disaster?
Too Fat to Fly
“The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death. The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the sub-prime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They had been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the the Wall Street people who paid themselves a fortune to design the bad loans.”
Michael Lewis Boomerang; Travels in the new Third World , 2011, W. W. Norton
* * * * *
…Nor, by the way, were economists much help. Instead of offering a clear consensus, they produced a cacophony of views, with many conservative economists, in our view, allowing their political allegiance to dominate their professional competence. Distinguished economists made arguments against effective action that were evident nonsense to anyone who had taken Econ 101 and understood it… Paul Krugman, Occupy Handbook
* * * * *
Have you read The Big Short by Lewis? I haven’t read Boomerang, but The Big Short tells the story of credit default swaps and the recession in the U.S. Sort of a prequel to Boomerang.
I will look it up. Lewis has worked in the financial world, and is by all accounts credible.