Turns out that the Group of Thirty's groundbreaking study on derivatives was led by Dennis Weatherstone, the former head of JP Morgan. This is getting kind of spooky, the way the Morgan mafia keeps showing up at the scene of the crime, especially when credit derivatives are involved.

The fact that the G30 study was headed up by Weatherstone makes it clear that this was part of an industry-led fight against regulation of credit derivatives, and the prestigious body of economic wisemen was essentially functioning as an industry mouthpiece.

Here is the lede from the 1993 NYT article:

A group of leading financial experts gave a relatively clean bill of health yesterday to the rapidly growing set of financial products called derivatives that some have suggested make the global financial system vulnerable to a widespread crisis.

Following up on my last post, this 2001 paper on global financial reform, from the UK's Economic and Social Research Council, presents the Group of Thirty as an example of a highly influential think tank on financial matters. And according to the authors, the Group of Thirty's most significant public stand came on the issue of derivatives:

Like most think tanks, the Group of Thirty has a number of constituencies. Most broadly, it attempts to influence mainstream attitudes to financial regulation and international economics (primarily as mediated through specialist media) through seminars and symposia, as well as through its publications series. In this visible, public role, the Group of Thirty was publicly most influential in its interventions on derivatives during the early 1990s.

Yesterday, in reading the wikipedia page of the Group of Thirty, I saw that the influential collection of economists and bankers had published a groundbreaking report on derivatives in 1993. I looked into it a bit further and it seems that the report was hailed within the banking industry as ushering derivatives into "mainstream" use.

Prior to the report there were a lot of legal and regulatory concerns surrounding the contracts; no one was exactly sure how they worked, or if they would compound risk in such a way that would increase the likelihood of financial calamity. The G30's report soothed these fears by explaining the contracts and outlining recommendations regarding their use. It appears to have given the financial instruments an elite stamp of approval, and the rest is history.

It turns out that all those fears were well-founded, and now we're living with the consequences. Anyone who listens to NPR has probably heard something about derivatives, particularly credit default swaps -- bond insurance gone wildly wrong -- given the role they've played in the financial crisis.

One interesting tidbit about the G30 report is that Paul Krugman was one of the elite economist/bankers in the group when it was published. Continuing my (probably misguided) practice of posting somewhat random comments to blog posts in the hopes that they get read, I asked him about the report:

Knee-jerk anti-Bush sentiment has led many to blame the commander-in-chief and his administration for the current financial disaster. But while Bush, Paulson, and Bernanke have done a terrible job presiding over the US economy, the chief villain responsible for this mess is a recent retiree. Alan Greenspan, the former Fed chairman, did more than anyone else to push the global economy to the brink.

Now that the global economy is barreling toward a severe and prolonged recession/depression, the paper of record has turned a critical eye to his legacy as Fed chief during the Wall Street boom years. Though his fall from grace began several years ago, this article is a milestone in that descent.

The article deals mainly with Greenspan's fierce opposition to regulating the credit derivatives that are now bringing global finance to its knees (maybe, like Barack Obama, he has been a socialist in disguise all these years?). It's not a full-on skewering, however: Greenspan's deep resentment of government and delusional understanding of financial markets led him to take numerous unwise policy stances that were ultimately very destructive, and a full accounting would require a much longer piece.

I just posted this on Joe Nocera's blog at the NYT. In a future post I will discuss it in more depth:

I was seriously disappointed to read in your latest column that you think that Gramm-Leach-Bliley (GLBA, the repeal of Glass-Steagall in 1999) has little to do with the current financial crisis. It is startling that someone with a million dollar book deal to write about this beast does not have a basic understanding of this legislation, but I guess that’s par for the course for the financial press.

For one thing, as part of a political compromise, GLBA allowed investment bank holding companies to avoid SEC oversight. This was a *very* important step in the process of getting to the point where broker dealers like Bear and Lehman carried ridiculous leverage ratios.

Did the feds allow Lehman Brothers to fail in order to execute a backdoor rescue of JP Morgan? That's what Ron Kirby argues:

It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.

Based on what economists have to say, the bailout plan that these jokers passed isn't going to work (see Krugman, or Roubini, or Baker, or Ritholtz). It's not going to work to keep people in their homes or their jobs, but it also isn't going to save the precious banks that Steny and Nancy and Barney care so much about.

With a government as corrupt, negligent, and downright idiotic as this one I wonder if we'll ever get the policy measures we need to escape economic ruin.

Wow. Via Calculated Risk.

The above is a good name for the fearmongering speeches and columns by bailout supporters over the last week, the unthinking and uninformed New York Times elites who all of a sudden got really scared about the economy and started deploying their precious words and column inches to the massive and not-yet-successful propaganda effort to convince regular people that they *just don't understand*, that handing hundreds of billions to Wall Street in return for toxic assets is what we absolutely need right now or our economy is toast.