Prophesy as much as you like, but always hedge.
Oliver Wendell Holmes, 1861
Mr. Greenspan blew up the Grand Coolee Dam and sent a wall of cash and credit flooding around the world like a rogue wave. But he was not the inventor of monetary dynamite, nor the only one with access to it. The Japanese set off their own deluge in the late 1980s, and then again in the mid‐1990s, dropping interest rates to zero. The combination of Nipponese desperation with American ingenuity is what we have to thank for today's bubbles.
After the Japanese stock market imploded in 1990, the U.S. tech stocks took off—up 900 percent between 1995 and 2000. Then the Kuwait stock market ballooned, up 471 percent in the next five years. Bombay stocks took off in 2003 and rose 340 percent. Meanwhile, U.S. housing prices doubled between 1995 and 2005. In England, the increase was even greater. Average house prices rose 220 percent in those 10 years.
Twenty years ago, the total notional sum of derivatives in the entire world was close to zero. At least that is the impression you get from looking at a chart showing the growth of derivatives in the years since. Since then, from nothing, the global supply of derivatives has risen faster than the NASDAQ, faster than oil, faster even than prices of Mayfair apartments. The twitty quants at big investment firms invent complex derivative contracts, give them a jolt of juice, and millions—no, billions or trillions—of ...