The Economist thinks so. Here’s evidence that something bubble-like was going on in the financial sector: the financial industry’s share of the stock market climbed from 5.2% in 1980 to 23.5% last year (see chart). The financial sector grew because traders learned how to corner an ever larger share of the world’s wealth through use of currency deregulation, the end of national controls on capital, markets for futures and options, and currency swaps, interest rate swaps, and finally the infamous credit default swaps (CDSs) that were never even run through a market to fix a nominal value on them. CDSs nearly bankrupted the world’s 18th largest company, AIG.
The Economist says governments should have regulated the markets for these new instruments. In the 1920s, margin allowed for unsecured stock purchases that led to the Crash of ‘29. Something like that happened over the last decade with swaps, yielding the Crash of ‘08.
1 comment:
AIG was bankrupted by CDSs - it is just that the government, aka Henry Paulson, aka all us taxpayers - stepped in at the last moment to backstop.
Prior to its downfall, AIG was the largest financial services company in the world.
Warren Buffet said in 2002 that CDSs were "weapons of financial mass destruction." Indeed.
Aloha,
Derek
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