computers took it from there. Futures selling would be minimal if the portfolio was performing well, but would
accelerate as markets fell. Fund managers loved the idea; by the autumn of 1987 some $100 billion of stock portfolios were “insured”, and the professors had made a fortune.
There was just one little problem. If this strategy was generally adopted, it would have exactly the opposite effect from the one intended, because any substantial market fall would
automatically generate a huge burst of futures selling. And a sudden wave of selling in the futures market would almost surely trigger panicky selling in the stock market—which could trigger
more futures selling, and so on.
And that’s more or less what happened. The effect was worsened by the fact that the stock market was in New York while the futures market was in Chicago, and the computer links between
them were extremely primitive.
It started on Wednesday, 14 October 1987, but the real carnage hit on the following Monday, 19 October, forever dubbed Black Monday. The stock market fell 23 percent, the largest one-day
percentage drop in history. 6 The markets eventually stabilized, with the help of a flood of new money from Alan Greenspan’s Federal
Reserve—one of the first appearances of what Wall Street came to call the “Greenspan Put”. Get into whatever trouble you may, Uncle Alan will bail you out.
The episode was a clear warning of the inherent dangers of financial “innovation”. Professors Leland and Rubinstein were obviously extremely clever men, as were the bankers using
their tools. Some of themhad to know that if enough people were using this “insurance”, any sizeable downturn would trigger large-scale selling and thereby cause
the very event they were supposedly trying to prevent. Credit default swaps and other financial derivatives often carry similar risks. Their use therefore requires regulation —particularly disclosure of positions to a regulator who can look across the whole market, and limitations on the total level of risk. But derivatives were too profitable for
Wall Street, which instead pushed in precisely the opposite direction.
Deregulation Triumphant: The Clinton Administration
THE 1990S WERE, it turns out, the best of times and the worst of times. The economic outlook entering the 1990s was extremely gloomy. In the late 1980s
the LBO-takeover–stock market bubble deflated, and long-term economic problems began to bite, once again.
But in the end, America’s economic performance in the 1990s was superb. The reason was the Internet revolution, together with venture capital and start-up systems. Starting with the
invention of the World Wide Web in 1990, Internet-based innovation and entrepreneurship generated sharply higher economy-wide productivity growth for the first time since the 1960s. Even though the
Internet was globally available and the World Wide Web had been invented in Europe, America spawned every major Internet company—Amazon, eBay, Yahoo, Google, Craigslist, Facebook—and
thousands of smaller ones. Clinton administration policy helped by privatizing the Internet in 1995, reforming parts of the telecommunications sector, and taking antitrust action against
Microsoft.
At the same time, however, the Clinton government created the regulatory environment that gave us the financial bubble and crisis of the 2000s. As president, Bill Clinton let the financial
sector run wild. Economic and regulatory policy was taken over by the industry’s designated drivers—Robert Rubin, Larry Summers, and Alan Greenspan. It was during this period that
America’s financial sector assumed its currentform—highly concentrated, sometimes criminal, and systemically dangerous. Its growing fraudulence even affected the
Internet industry, via a stock market bubble that Wall Street deliberately inflated. The pervasive level of fraud in “dot-com” stocks was nakedly obvious to everyone in the industry
accelerate as markets fell. Fund managers loved the idea; by the autumn of 1987 some $100 billion of stock portfolios were “insured”, and the professors had made a fortune.
There was just one little problem. If this strategy was generally adopted, it would have exactly the opposite effect from the one intended, because any substantial market fall would
automatically generate a huge burst of futures selling. And a sudden wave of selling in the futures market would almost surely trigger panicky selling in the stock market—which could trigger
more futures selling, and so on.
And that’s more or less what happened. The effect was worsened by the fact that the stock market was in New York while the futures market was in Chicago, and the computer links between
them were extremely primitive.
It started on Wednesday, 14 October 1987, but the real carnage hit on the following Monday, 19 October, forever dubbed Black Monday. The stock market fell 23 percent, the largest one-day
percentage drop in history. 6 The markets eventually stabilized, with the help of a flood of new money from Alan Greenspan’s Federal
Reserve—one of the first appearances of what Wall Street came to call the “Greenspan Put”. Get into whatever trouble you may, Uncle Alan will bail you out.
The episode was a clear warning of the inherent dangers of financial “innovation”. Professors Leland and Rubinstein were obviously extremely clever men, as were the bankers using
their tools. Some of themhad to know that if enough people were using this “insurance”, any sizeable downturn would trigger large-scale selling and thereby cause
the very event they were supposedly trying to prevent. Credit default swaps and other financial derivatives often carry similar risks. Their use therefore requires regulation —particularly disclosure of positions to a regulator who can look across the whole market, and limitations on the total level of risk. But derivatives were too profitable for
Wall Street, which instead pushed in precisely the opposite direction.
Deregulation Triumphant: The Clinton Administration
THE 1990S WERE, it turns out, the best of times and the worst of times. The economic outlook entering the 1990s was extremely gloomy. In the late 1980s
the LBO-takeover–stock market bubble deflated, and long-term economic problems began to bite, once again.
But in the end, America’s economic performance in the 1990s was superb. The reason was the Internet revolution, together with venture capital and start-up systems. Starting with the
invention of the World Wide Web in 1990, Internet-based innovation and entrepreneurship generated sharply higher economy-wide productivity growth for the first time since the 1960s. Even though the
Internet was globally available and the World Wide Web had been invented in Europe, America spawned every major Internet company—Amazon, eBay, Yahoo, Google, Craigslist, Facebook—and
thousands of smaller ones. Clinton administration policy helped by privatizing the Internet in 1995, reforming parts of the telecommunications sector, and taking antitrust action against
Microsoft.
At the same time, however, the Clinton government created the regulatory environment that gave us the financial bubble and crisis of the 2000s. As president, Bill Clinton let the financial
sector run wild. Economic and regulatory policy was taken over by the industry’s designated drivers—Robert Rubin, Larry Summers, and Alan Greenspan. It was during this period that
America’s financial sector assumed its currentform—highly concentrated, sometimes criminal, and systemically dangerous. Its growing fraudulence even affected the
Internet industry, via a stock market bubble that Wall Street deliberately inflated. The pervasive level of fraud in “dot-com” stocks was nakedly obvious to everyone in the industry
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