The Washington Post has a very interesting story today on the failure of our government agencies to regulate the derivatives market, and the consequences that has had for our financial system. A very few people in the Clinton administration wanted additional regulation on the derivatives market, but substantial majorities, both in the executive and the legislative branches, and in both the Clinton and Bush administrations, shot down the various attempts that were made to introduce additional legislation. As a result, the government had no insight into the full size of the derivatives market, nor to how badly individual firms were leveraged.
I think the Washington Post's story is an important one, but we should also remember that there are lots and lots of people and factors to blame for this: it can't all be laid at Greenspan's feet. The Republicans were responsible for pushing so hard against common-sense regulations; the Democrats were responsible for pushing Fannie and Freddy to underwrite stupid mortgages; the folks on Wall Street were responsible for stupidly believing, umm, "flawed" computer models; and you and I were responsible for buying up houses at inflated prices and mortgaging ourselves up to our necks to buy shitloads of stupid consumer goods that we don't need.
One of many, many interesting and slightly scary things about this crisis is that less than a year ago, I purchased and read with great interest Nicholas Taleb's flawed but fascinating book The Black Swan. In that book, he spent several hundred more pages than he really needed explaining why our current financial system was so badly at risk. His indictment of the risk models used by Wall Street made perfect sense to me. And even so, I didn't get it: I didn't understand at the time what is so clear now, that our financial system was a house of cards, waiting to come tumbling down.