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Hope is the expectation that something outside of ourselves, something or someone external, is going to come to our rescue and we will live happily ever after. – Dr. Robert Anthony

Oct 20, 2008

Greenspan, Rubin and Summers guilty for the economic collapse

Derivative: A financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset.

On October 1, 2007 I wrote a post about housing bubble and Alan Greenspan. At that time we thought that the house bubble would have a sort of influence on the world economies, affecting mostly Canada and the USA. (Scroll down to the end of this post)

Unfortunately it had much worse and deeper implications and now the whole international market is falling apart. The domino keeps falling and it’s hard to predict when it will stop.

Back in 1997, a lady named Brooksley Born, who was the Chairperson of the Commodity Futures Trading Commission-a federal agency that regulates options and futures trading- warned in congressional testimony that unregulated trading in derivatives could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.”
In 1998 she asked again for an official regulation of the ‘darling’derivatives, the darling embraced and loved with fierce passion by Alan Greenspan- Federal Reserve Chairman at that time, Robert Rubin- Secretary of Treasury and Larry Summers- Rubin’s deputy. The trio blocked and silenced Ms.Born. No, they did not want regulations. After all, trillion of dollars where at stakes, already moved by the Wall Street through the shady derivative market.

‘In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress “to prevent Ms. Born from acting until more senior regulators developed their own recommendations.” (Levitt now says he regrets that decision.) Months later, the huge hedge fund Long Term Capital Management nearly collapsed–confirming some of Born’s warnings. (Bets on derivatives were a key reason.)’- The Nation.com

This is what she warned about long time ago:
“Right now, the people who trade on the floor have to keep records, and the exchanges have to keep records. Under the proposed elimination of federal oversight, the record-keeping requirements would be gone. So if fraudulent traders on the floor wanted to, they could decide not to keep records or destroy their records. And they would not violate any federal law unless we actually had a subpoena out for them. It would also be harder to detect these abuses early on. So it would only be likely that we would find out about them if there either was a tremendous upheaval on the market or a customer came to us with a complaint. That might be substantially later than when we typically get involved now.”- Derivativesstrategies.com

She was right and they were dead- wishful thinking!– wrong. The 700 billion bail out vindicated her.

This is my October 1, 2007 post on Alan Greenspan.

Greenspan: The mastermind of the housing bubble?
October 1, 1007

I used to think of Alan Greenspan like the brilliant mind behind world’s economy.
Who is the man Alan Greenspan? Is he more of the professional jazz musician? Or is he identified as the man behind the ‘housing bubble’? I guess he would rather be the jazz musician right now.
I read the review about his book The Age of Turbulence: Adventures in a New World and I don’t know what to believe anymore.
Greenspan’s policies of adjusting interest rates to historic lows contributed to the housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.
Greenspan also praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.”
It is already known what happened next: The subprime mortgage industry collapsed in March 2007. The effects are still creating havoc to the US economy and to a lower extent to Canadian one.

With the collapse of the housing market, US home owners lost billions of dollars in their property asset values all over the US. And, the bottom is not in sight yet!
In Canada, we will not be immune to the housing market price correction.
We may expect prices to correct 15% to 20% considering house prices have gone up almost 100% (in some cases even more) over the past 6 years.


  1. » Greenspan, Rubin and Summers guilty for the economic collapse Said,

    […] Wealth Channels wrote an interesting post today onHere’s a quick excerptGreenspan, Rubin and Summers guilty for the economic collapse Posted on October 20th, 2008 in Finance/Investing by Rodica Derivative: A financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset. On October 1, 2007 I wrote a post about housing bubble and Alan Greenspan. At that time we thought that the house bubble would have a sort of influence on the world economies, affecting mostly Canada and […]

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