Derivatives and the gambling nature behind them have destroyed many institutions from the South Sea Company in the 1700’s to the S&L, OCAP, LTMC, to today’s sub prime debacle.

For Greenspan to say today that he and others did not have the intelligence, information, etc to predict such a crisis is absolutely absurd, erroneous, preposterous, and quite possibly the worst attempt to deceive Joe the plumber.

A 200 year old bank in England was put out of business in 6 months for derivatives irresponsibility.

The Fast Money desk and other news stations are describing this as an era of great ignorance.

Well first off, this is not ignorance, but a contrived scenario: “Under the Federal Reserve Act, Panics are scientifically created. The present panic is the first scientifically created one, worked out as we figure a mathematical equation.” Congressman Charles Lindbergh 1921 in response to the panic of 1920.

For Joe the plumber this is all you have to know: The SEC in 2002 allowed the banks to have more leverage. The average bank went from leverage of 10 to 1 to around 40 to 1. The insane like JPM & C stepped it up to 74 to 1 and the stupid like AIG, FNM, and FRE took their leverage to over 100 to 1.

The second thing Joe the plumber needs to understand is that all markets have cycles. Cycles have peaks and valleys. To think the housing market would never go down is against all common sense and is the very first thing people like Greenspan and Wall st. learns in economics 101.

The third issue is that when interest rates go higher so will the ARMS, ALT~A, and other variable interest rate contracts. So as Greenspan began to hike interest rates, since they were artificially low after 911, he had to know this would eventually create massive financial burden upon no document low income sub prime loans.

This is probably why Greenspan and Bernanke only raised interest rates in quarter point increments. They knew from past bubbles that raising rates created problems. Was this not the whole idea of “irrational exuberance.” Raising rates was a way of slowing down speculation which eventually led to the popping of the dot com bubble. 

Lastly, all of Wall st. and the government have been hiring physicists, mathematicians, and genius types for many years to develop and extrapolate formulas to create models of prediction. Surely some one of this vast group of people had the possible outcome of a housing led derivative bubble.

Sorry Greenspan you and many others are not coming clean.

http://harpers.org/archive/2008/02/0081908