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Thanks Frank. You're absolutely right, derivatives could end up being a major problem. That's part of what is adding to the uncertainty right now and causing banks to tighten their purse strings.

Funny that you should mention derivatives, I wrote a little on the subject just this morning:

"I anyone else as disgusted with Alan Greenspan as I am?

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” - Alan Greenspan circa 2004

I have been thinking about Alan Greenspan's role in the current financial crisis this morning, probably because he is scheduled to testify today before the House Committee of Government Oversight and Reform. I'm sure that I wasn't the first person to hammer on "The Maestro," but I have been bashing him in my blog since February. He absolutely disgusts me. What I wrote about him back then still applies today, but the more we find out about this financial crisis, the more I feel that he was as responsible as anyone for the mess that we currently find ourselves in.

Here's what I wrote on the subject back in February:

"Because a huge chunk of this mess that we’ve gotten ourselves into now is Alan Greenspan’s fault. Did Bernanke lower the Federal Funds rate to almost nothing and leave it there for years creating the mother of all housing, it was Greenspan. He borrowed from Peter to pay Paul as the saying goes, or in this case I suppose that he was borrowing from Ben to pay Alan, pushing off a little economic pain years ago [the bursting of the tech bubble] for a much worse situation today. Then just when things are about to get really bad, Greenspan just rides off into the sunset and makes more money than the average U.S. citizen could ever imagine in the private sector by writing books, consulting, and giving speeches while poor Bernanke is left to clean up his mess. I realize that Bernanke is not blameless in this whole situation, but he certainly didn’t start it."

I understand that everyone makes mistakes, even me if you can believe that, but what infuriates me more than the mistakes that Greenspan made is his complete lack of accountability. If you screw up, own up to it. I will have a lot more respect for you. Greenspan has repeatedly refused to accept any responsibility for his role in the financial crisis

This morning I came across a great article on Mr. Greenspan and how he is as responsible as anyone for the current financial crisis: Taking Hard New Look at a Greenspan Legacy (

I already mentioned how I feel about Greenspan's role in inflating the housing bubble, but this article talks about the role he played in the world of derivatives. For those of you who aren't familiar with them, and I suspect that most who visit this site are by now, derivatives are completely least until instruments that were developed to hedge against investment losses.

The creation of and trading of derivatives, along with securitization, encouraged companies to take much more risk than they normally would have if they didn't have this form of insurance and if they actually had to keep some of the paper that they were issuing on their books. Since 2002, the derivatives market has increased nearly fivefold, from $106 trillion to its current $531 trillion.

Instead of protecting companies from risk, derivatives are now actually making banks more risk averse and less willing to lend money to each other. No one really knows who has exposure to what and everyone is skeptical of how derivatives contracts are being valued.

For over a decade Mr. Greenspan was one of the leading proponents against government regulation of the derivatives market and at the time his opinion carried a lot of weight. Here's what he said on the subject at a Senate hearing in 2003 “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so...“We think it would be a mistake” to more deeply regulate the contracts.

Anyhow, Greenspan and his smug refusal to acknowledge that he played any part in the mess that we find ourselves in today makes me sick. Perhaps he will change his tune in today's testimony, but I doubt it. I hope that they hold his feet to the fire.

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