The Great American Stick-Up: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street
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Thus it was that professional deregulation activist Wendy Gramm came to be appointed by Reagan as chair of the Commodity Futures Trading Commission in 1988, which was the governmental arm most likely to regulate those newfangled investment devices that seemed so much like futures. Gramm, who would never think of questioning any of these clever “modern” gimmicks, saw them as an unmitigated blessing.
Rather than destabilizing the world economy, as they would prove to do two decades later, these products were supposed to be a win-win that would increase market efficiency by bringing order to pricing and the management of risk. Greater productivity, lower prices, and enormous new sources of wealth would inevitably follow. Of course, the top echelon of Wall Street insiders would skim the cream off, but, the argument went, the rest of the country would benefit as well. Not only would the economy be stronger, but American individuals, pension plans, and charities could all ride this dragon skyward, through investments and through donations from the mega-rich looking for tax shelters. It is no accident, then, that in each of the recent economic collapses, from Enron to Bernie Madoff, arose the ever-present laments from charities that were suddenly defunded.
The derivatives and swaps involved buying and packaging financial risk and selling it based on a system of corresponding grades. So a bank might buy up a collection of mortgages or credit card debts from lenders, who could then take this capital to bankroll even more loans. The buyers of this securitized debt would sort and slice it into levels of predicted risk; the more risk, the higher the return, of course. A buyer in this still small but expanding market could then “insure” this risk -- for a price.
The end result by the turn of the century was a massive casino in which bettors poured money into huge gambles on expected gain or to hedge against a loss if conditions changed. Think Las Vegas -- only this market was unregulated instead of being supervised by government agencies, the same way we regulate bets made on gambling tables or the future price of products such as wheat, pork bellies, or oil on regulated commodity exchanges. Such regulations increase transparency and accuracy in the description of the commodity, the terms of trade in their future, and the accountability of the parties involved.