Much has been said about the financial instruments that got our economy into the mess we see around us—GDP growth that lacks sustainability, unemployment over 10 percent, and so on—but given their complexity and banks’ steadfast insistence that they should remain largely unregulated, I thought a few more stories couldn’t hurt.
We recommended NPR’s reporting on the financial crisis in “The Giant Pool of Money” a few months ago, and Professor of Finance Jonathan Parker echoed our sentiments in his latest blog post. What’s more, he also points out a follow up to that award winning piece, “Return To the Giant Pool of Money.” Produced as a part of Chicago-based This American Life, both streaming audio and written versions are available on the program’s website.
Before the crisis, I would have ever expected This American Life to dive into financial instruments. Derivatives were largely unknown to the American public before the subprime collapse, but that doesn’t mean insiders were the only ones who knew of the schemes—or were concerned with the derivative market’s lack of transparency. Brooksley Born was at the center of the derivatives world in the 1990s. During her tenure as chair of the Commodity Futures Trading Commission from 1996 to 1999, she battled then Treasury Secretary Robert Rubin, Fed Chairman Alan Greenspan, and Deputy Secretary of the Treasury Lawrence Summers in an attempt to regulate the derivatives market. Her interview is a part of a Frontline episode. Born had hoped to lift the veil of secrecy surrounding derivatives deals—no small task.
“There were credit default swap trades where there was no dealer-to-dealer confirmation of the trade,” Professor of Finance Bob McDonald told me. “It was sort of a ‘put the piece of paper in the filing cabinet and forget about it’ kind of thing.” That may not have been a problem if the stakes had been smaller. But the deals swapped trillions of dollars and were interconnected like a nontrivial financial version of Six Degrees of Kevin Bacon.
If you can spare an hour this weekend for a financial thriller (yes, there’s a whole genre devoted to them), the entire Frontline episode is available online. Or, if you’re short on time, pick out the bits that interest you from the program’s timeline.