Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

by Matt Taibbi

Which is this: none of it really matters to us. The presidential election is a drama that we Americans have learned to wholly consume as entertainment, divorced completely from any expectations about concrete changes in our own lives.

In the new American ghetto, the nightmare engine is bubble economics, a kind of high-tech casino scam that kills neighborhoods just like dope does, only the product is credit, not crack or heroin. It concentrates the money of the population in just a few hands with brutal efficiency, just like narco-business, and just as in narco-business the product itself, debt, steadily demoralizes the customer to the point where he’s unable to prevent himself from being continually dominated.

What the Santelli rant did was provide those already pissed-off viewers a place to focus their anger away from the financial services industry, and away from the genuinely bipartisan effort to subsidize Wall Street. Santelli’s rant fostered the illusion that the crisis was caused by poor people, which in this county usually conjures a vision of minorities, no matter how many poor white people there are, borrowing for too much house. It was classic race politics—the plantation owner keeping the seemingly inevitable pitchfork out of his abdomen by pitting poor whites against poor blacks. And it worked, big-time.

This is how you get middle-class Americans pushing deregulation for rich bankers. Your average working American looks around and sees evidence of government power over his life everywhere. He pays high taxes and can’t sell a house or buy a car without paying all sorts of fees. If he owns a business, inspectors come to his workplace once a year to gouge him for something whether he’s in compliance or not. If he wants to build a shed in his backyard, he needs a permit from some local thief in the city clerk’s office.

This stuff happens. It’s not paranoia. There are a lot of well-meaning laws that can be manipulated, or go wrong over time, or become captive to corrupt lawyers and bureaucrats who fight not to fix the targeted social problems, but to retain their budgetary turf. Tea Party grievances against these issues are entirely legitimate and shouldn’t be dismissed. The problem is that they think the same dynamic they see locally or in their own lives—an overbearing, interventionist government that seeks to control, tax, and regulate everything it can get its hands on—operates the same everywhere.

There are really two Americas, one for the grifter class, and one for everybody else. In everybody-else land, the world of small businesses and wage-earning employees, the government is something to be avoided, an overwhelming, all-powerful entity whose attentions usually presage some kind of financial setback, if not complete ruin. In the grifter world, however, government is a slavish lapdog that the financial companies that will be the major players in this book use as a tool for making money.

When the Republicans win elections, their voters think they’ve struck a blow against big government. And when a Democratic hero like Barack Obama wins, his supporters think they’ve won a great victory for tolerance and diversity. Even I thought that.

Greenspan was also the perfect front man for the hijacking of the democratic process that took place in the eighties, nineties, and the early part of the 2000s. During that time political power gradually shifted from the elected government to private and semiprivate institutions run by unelected officials whose sympathies were with their own class rather than any popular constituency. We suffered a series of economic shocks over the course of those years, and the official response from the institutions subtly pushed the country’s remaining private wealth to one side while continually shifting the risk and the loss to the public.

the twofold basic deception of American politics: a system that preaches sink-or-swim laissez-faire capitalism to most but acts as a highly interventionist, bureaucratic welfare state for a select few.

This belief in “objective reality” is what gives objectivists their characteristic dickish attitude: since they don’t really believe that facts look different from different points of view, they don’t feel the need to question themselves or look at things through the eyes of others.

In 1968 he joined the campaign of Richard Nixon, going to work as an adviser on domestic policy questions. He then worked for Nixon’s Bureau of the Budget during the transition, after Nixon’s victory over Humphrey. This was a precursor to an appointment to serve on Gerald Ford’s Council of Economic Advisers in 1974; he later ingratiated himself into the campaign of Ronald Reagan in 1980, served on a committee to reform Social Security, and ultimately went on to become Federal Reserve chief in 1987.

How did it happen? Among other things, Alan Greenspan was one of the first Americans to really understand the nature of celebrity in the mass-media age. Thirty years before Paris Hilton, Greenspan managed to become famous for being famous—and levered that skill into one of the most powerful jobs on earth. ——— Alan Greenspan’s political career was built on a legend—the legend of the ultimate Wall Street genius, the Man with All the Answers. But the legend wasn’t built on his actual performance as an economist. It was a reputation built on a reputation.

although Greenspan eventually declined a formal role in Nixon’s government, he would henceforth thrive in a role as economic guru to men with power, a role that the press somehow never failed to be made aware of.

Greenspan was exceptionally skilled at pushing his image of economic genius, particularly since his performance as an economic prognosticator was awful at best. “He was supposedly the smartest man in the world,” laughs economist Brian Wesbury today. “He was the greatest, the Maestro. Only if you look at his record, he was wrong about almost everything he ever predicted.”

To recap: Greenspan hikes Social Security taxes by a trillion and a half dollars or so, four presidents spend all that money on other shit (including, in George W. Bush’s case, a massive tax cut for the wealthy), and then, when it comes time to start paying out those promised benefits, Greenspan announces that it can’t be afforded, the money isn’t there, benefits can’t be paid out. It was a shell game—money comes in the front door as payroll taxes and goes right out the back door as deficit spending, with only new payroll taxes over the years keeping the bubble from popping, continuing the illusion that the money had never left.

Coming up with a scheme like this is the sort of service that endears one to presidents, and by the mid-eighties Greenspan got his chance at the big job. Reagan had grown disenchanted with Volcker. The administration apparently wanted a Fed chief who would “collaborate more intimately with the White House,” as one Fed historian put it, and they got him in Greenspan, whom Reagan put in the top job in 1987.

Imagine the whole economy has turned into a casino. Investors are betting on oil futures, subprime mortgages, and Internet stocks, hoping for a quick score. In this scenario the major brokerages and investment banks play the role of the house. Just like real casinos, they always win in the end—regardless of which investments succeed or fail, they always take their cut in the form of fees and interest. Also just like real casinos, they only make more money as the number of gamblers increases: the more you play, the more they make. And even if the speculative bubbles themselves have all the inherent value of a royal flush, the money the house takes out is real. Maybe those oil futures you bought were never close to being worth $149 a barrel in reality, but the fees you paid to Goldman Sachs or Morgan Stanley to buy those futures get turned into real beach houses, real Maseratis, real Park Avenue town houses. Bettors chase imaginary riches, while the house turns those dreams into real mansions. Now imagine that every time the bubble bursts and the gamblers all go belly-up, the house is allowed to borrow giant piles of money from the state for next to nothing. The casino then in turn lends out all that money at the door to its recently busted customers, who flock back to the tables to lose their shirts all over again. The cycle quickly repeats itself, only this time the gambler is in even worse shape than before; now he’s not only lost his own money, he’s lost his money and he...

One way that money is created is through new issuance of private credit; when private banks issue new loans, they essentially create money out of thin air. The Fed supervises this process and theoretically monitors the amount of new loans issued by the banks. It can raise or lower the amount of new loans by raising or lowering margin requirements, i.e., the number of hard dollars each bank has to keep on hand every time it makes a loan. If the margin requirement is 10 percent, banks have to keep one dollar parked in reserve at the Fed for every ten they lend out. If the Fed feels like increasing the amount of money in circulation, it can lower the margin rate to, say, 9 percent, allowing banks to lend out about eleven dollars for every one kept in reserve at the Fed. The bank can also inject money into the system directly, mainly through two avenues. One is by lending money directly to banks at a thing called the discount window, which allows commercial banks to borrow from the Fed at relatively low rates to cover short-term financing problems. The other avenue is for the Fed to buy Treasury bills or bonds from banks or brokers. It works like this: The government, i.e., the Treasury, decides to borrow money. One of a small group of private banks called primary dealers is contracted to raise that money for the Treasury by selling T-bills or bonds or notes on the open market. Those primary dealers (as of this writing there are eighteen of them, all major institutions, includ...

the Fed’s main tool for regulating the money supply during the Greenspan years wasn’t its purchase of securities or control over margin requirements, but its manipulation of interest rates. Here’s how this works: When a bank falls short of the cash it needs to meet its reserve requirement, it can borrow cash either from the Fed or from the reserve accounts of other banks. The interest rate that bank has to pay to borrow that money is called the federal funds rate, and the Fed can manipulate it. When rates go up, borrowers are discouraged from taking out loans, and banks end up rolling back their lending. But when the Fed cuts the funds rate, banks are suddenly easily able to borrow the cash they need to meet their reserve requirements, which in turn dramatically impacts the amount of new loans they can issue, vastly increasing the money in the system.

Here we have to pause briefly to explain something about these rate cuts. When the Fed cuts the funds rate, it affects interest rates across the board. So when Greenspan cut rates for five consecutive years, it caused rates for bank savings, CDs, commercial bonds, and T-bills to drop as well. Now all of a sudden you have a massive number of baby boomers approaching retirement age, and they see that all the billions they have tied up in CDs, money market funds, and other nest-egg investments are losing yields. Meanwhile Wall Street was taking that five consecutive years of easy money and investing it in stocks to lay the foundation for Greenspan’s first bubble, the stock market mania of the nineties. Baby boomers and institutional investors like pension funds and unions were presented with a simple choice: get into the rising yields of the stock market or stick with the declining yields of safer investments and get hammered. As economist Brian Wesbury puts it, it was as if Greenspan was holding up a green light, inviting people to rush into the equity markets.

slashing the funds rate from 6 percent to 5.75 percent, flooding the economy with money at a time when the stock market was exploding. With easy credit everywhere and returns on savings and CDs at rock bottom, everyone and his brother rushed ass first into the tech-fueled stock market. “That’s the beginning of the biggest stock market bubble in U.S. history,” says Fleckenstein. But Greenspan’s biggest contribution to the bubble economy was psychological. As Fed chief he had enormous influence over the direction of the economy and could have dramatically altered history simply by stating out loud that the stock market was overvalued. And in fact, Greenspan in somewhat hesitating fashion tried this—with his famous December 1996 warning that perhaps “irrational exuberance” had overinflated asset values. This was spoken in the full heat of the tech bubble and is a rare example of Greenspan speaking, out loud, the impolitic truth. It’s worth noting, however, that even as he warned that the stock market was overheated, he was promising to not do a thing about it. On the same day that he spoke about “irrational exuberance,” Greenspan said that the Fed would only act if “a collapsing financial asset bubble does not threaten to impair the real economy.” Since popping a bubble always impairs the real economy, Greenspan was promising never to do anything about anything. Despite Greenspan’s rather explicit promise to sit on his liver-spotted hands during the bubble, Wall Street reacte...

When a snooty hedge fund full of self-proclaimed geniuses called Long-Term Capital Management exploded in 1998, thanks to its managers’ wildly irresponsible decision to leverage themselves one hundred or two hundred times over or more to gamble on risky derivative bets, Greenspan responded by orchestrating a bailout, citing “systemic risk” if the fund was allowed to fail. The notion that the Fed would intervene to save a high-risk gambling scheme like LTCM was revolutionary. “Here, you’re basically bailing out a hedge fund,” says Dr. John Makin, a former Treasury and Congressional Budget Office official. “This was a bad message to send. It basically said to people, take more risk. Nobody is going to stop you.” When the Russian ruble collapsed around the same time, causing massive losses in emerging markets where investors had foolishly committed giant sums to fledgling economies that were years from real productivity, Greenspan was spooked enough that he announced a surprise rate cut, again bailing out dumb investors by letting them borrow their way out of their mistakes. “That’s what capitalism is supposed to be about—creative destruction,” says Fleckenstein. “People who take too much risk are supposed to fail sometimes.” But instead of letting nature take its course, Greenspan came to the rescue every time some juiced-up band of Wall Street greedheads drove their portfolios into a tree.

The “Greenspan put” referred to Wall Street’s view of cheap money from the Fed playing the same hedging role as a put option; it’s a kind of insurance policy against a declining market you keep in your back pocket. Instead of saying, “Well, if IBM drops below ninety-five, I can always sell my put options,” Wall Street was saying, “Well, if the market drops too low, Greenspan will step in and lend us shitloads of money.”

Greenspan’s reigning achievement in this area was his shrewd undermining of the Glass-Steagall Act, a Depression-era law that barred insurance companies, investment banks, and commercial banks from merging. In 1998, the law was put to the test when then–Citibank chairman Sandy Weill orchestrated the merger of his bank with Travelers Insurance and the investment banking giant Salomon Smith Barney. The merger was frankly and openly illegal, precisely the sort of thing that Glass-Steagall had been designed to prevent—the dangerous concentration of capital in the hands of a single megacompany, creating potential conflicts of interest in which insurers and investment banks might be pressed to promote stocks or policies that benefit banks, not customers. Moreover, Glass-Steagall had helped prevent exactly the sort of situation we found ourselves subject to in 2008, when a handful of companies that were “too big to fail” went belly up thanks to their own arrogance and stupidity, and the government was left with no choice but to bail them out. But Weill was determined to do this deal, and he had the backing of Bill Clinton, Clinton’s Treasury secretary Bob Rubin (who would go on to earn $100-plus million at postmerger Citigroup), and, crucially, Alan Greenspan. Weill met with Greenspan early in the process and received what Weill called a “positive response” to the proposal; when the merger was finally completed, Greenspan boldly approved the illegal deal, using an obscure provisi...

credit default swaps and the like allowed companies to sell something like insurance protection without actually having the money to pay that insurance—a situation that allowed lenders to feel that they were covered and free to take more risks, when in fact they were not. These instruments were most often risk enhancers, not risk eliminators.

It was in the immediate wake of all these historically disastrous moves—printing 1.7 trillion new dollars in the middle of a massive stock bubble, dismantling the Glass-Steagall Act, deregulating the derivatives market, blowing off his regulatory authority in the middle of an era of rampant fraud—that Greenspan was upheld by the mainstream financial and political press as a hero of almost Caesarian stature.

Greenspan’s response to the horrific collapse of the tech bubble in 2000–2001 was characteristic and predictable. More than $5 trillion worth of wealth had been destroyed in worthless tech stocks, but instead of letting investors feel the pain they deserved, Greenspan did what he had always done: he flooded the market with money all over again and inflated a new bubble. Only this was the biggest “Greenspan put” of all: in the wake of the tech bubble he cut rates eleven consecutive times, all the way down to 1 percent, an all-time low, and began talking out loud about housing and mortgages as the new hot table in the casino. “When the real estate bubble came along as a consequence of the money printing that was used to sort of drink ourselves sober after the equity bubble, I knew it was going to be an even bigger disaster,” says Fleckenstein.

in June 2004, just a few months after he encouraged Americans to shun fixed-rate mortgages for adjustable-rate mortgages, Greenspan raised rates for what would be the first of seventeen consecutive times. He would raise rates at every FOMC meeting between June 2004 and the time he left office two years later, more than quadrupling interest rates, moving them from 1 percent to 4.5 percent. In other words, he first herded people into these risky mortgage deals and then, seemingly as a gift to the banks on his way out of town, spent two straight years jacking up rates to fatten the payments homeowners had to make to their lenders.

Greenspan was the crucial enabler of the bad ideas and greed of others.

voters have no real say over what the Fed does. Citizens do not even get to see transcripts of FOMC meetings in real time; we’re only now finding out what Greenspan was saying during the nineties. And despite repeated attempts to pry open the Fed’s books, Congress as of this writing has been unsuccessful in doing so

The falsification mania went in all directions, as Eljon and Clara found out. On one hand, their broker Edwards doctored the loan application to give Clara credit for $7,000 in monthly income, far beyond her actual income; on the other hand, Edwards falsified the couple’s credit scores downward, putting them in line for a subprime loan when they actually qualified for a real, stable, fixed bank loan. Eljon and his wife actually got a worse loan than they deserved: they were prime borrowers pushed down into the subprime hell because subprime made the bigger commission.

Now the relative appeal of a mortgage-based investment was not based on the individual borrower’s ability to pay over the long term; instead, it was based on computations like “What is the likelihood that more than ninety-three out of one hundred homeowners with credit scores of at least 660 will default on their loans next month?” These computations were highly subjective and, like lie-detector tests, could be made to say almost anything the ratings agencies wanted them to say. And the ratings agencies, which were almost wholly financially dependent upon the same big investment banks that were asking them to rate their packages of mortgages, found it convenient to dole out high ratings to almost any package of mortgages that crossed their desks.

The ratings agencies were shameless in their explanations for the seemingly inexplicable decision to call time-bomb mortgages risk free for years on end. Moody’s, one of the two agencies that control the vast majority of the market, went public with one of the all-time “the dog ate my homework” moments in financial history on May 21, 2008, when it announced, with a straight face, that a “computer error” had led to a misclassification of untold billions (not millions, billions) of junk instruments. “We are conducting a thorough review of the matter,” the agency said.

banking industry regulators—in particular a set of bylaws called the Basel Accords, which all major banking nations adhere to—created rules to make sure that those holdings these institutions kept were solid. These rules charged institutions for keeping their holdings in investments that were not at least AAA rated. In order to avoid these capital charges, institutions needed to have lots of “safe” AAA-rated paper. And if you could find AAA-rated paper that earns LIBOR plus fifty, instead of buying the absolutely safe U.S. Treasury notes that might earn LIBOR plus twenty, well, then, you jumped on that chance—because that was 0.30 more percentage points you were making. In banks and insurance companies with holdings in the billions, that subtle discrepancy meant massive increases in revenue.

A credit default swap is just a bet on an outcome. It works like this: Two bankers get together and decide to bet on whether or not a homeowner is going to default on his $300,000 home loan. Banker A, betting against the homeowner, offers to pay Banker B $1,000 a month for five years, on one condition: if the homeowner defaults, Banker B has to pay Banker A the full value of the home loan, in this case $300,000. So Banker B has basically taken 5–1 odds that the homeowner will not default. If he does not default, Banker B gets $60,000 over five years from Banker A. If he does default, Banker B owes Banker A $300,000.

One is that no regulations were created to make sure that at least one of the two parties in the CDS had some kind of stake in the underlying bond. The so-called naked default swap allowed Bank A to take out insurance with Bank B not only on its own IBM holdings, but on, say, the soon-to-be-worthless America Online stock Bank X has in its portfolio. This is sort of like allowing people to buy life insurance on total strangers with late-stage lung cancer—total insanity. The other factor was that there were no regulations that dictated that Bank B had to have any money at all before it offered to sell this CDS insurance. In other words, Bank A could take out insurance on its IBM holdings with Bank B and get an exemption from lending restrictions from regulators, even if Bank B never actually posted any money or proved that it could cover that bet.

It was a game of hot potato in which money was invented out of thin air in the form of a transparently bogus credit scheme, converted through the magic of modern financial innovation into highly combustible, soon-to-explode securities, and then quickly passed up the chain with lightning speed—from the lender to the securitizer to the major investment banks to AIG, with each party passing it off as quickly as possible, knowing it was too hot to hold. In the end that potato would come to rest, sizzling away, in the hands of the Federal Reserve Bank.

What is most amazing about the mortgage-scam era is how consistent the thinking was all the way up the chain. At the very bottom, lowlifes like Solomon Edwards, the kind of shameless con man who preyed on families and kids and whom even other criminals would look down on, simply viewed each family as assets to be liquidated and converted into one-time, up-front fees. They were incentivized to behave that way by a kink in the American credit system that made it easier, and more profitable, to put a torch to a family’s credit rating and collect a big up-front fee than it was to do the job the right way. And, amazingly, it was the same thing at the very top. When the CEO of Goldman Sachs stood up in the conference room of the New York Federal Reserve Bank and demanded his money, he did so knowing that it was more profitable to put AIG to the torch than it was to try to work things out.

Two other things are striking about the mortgage-scam era. One was that nobody in this vast rogues’ gallery of characters was really engaged in building anything.

In the meantime, and this is the second thing that’s so amazing, almost everyone who touched that mountain turned out to be a crook of some kind.

We paid for this instead of a generation of health insurance, or an alternative energy grid, or a brand-new system of roads and highways. With the $13-plus trillion we are estimated to ultimately spend on the bailouts, we could not only have bought and paid off every single subprime mortgage in the country (that would only have cost $1.4 trillion), we could have paid off every remaining mortgage of any kind in this country—and still have had enough money left over to buy a new house for every American who does not already have one.

The formula was the same formula we see in every election: Republicans demonize government, sixties-style activism, and foreigners. Democrats demonize corporations, greed, and the right-wing rabble. Both candidates were selling the public a storyline that had nothing to do with the truth. Gas prices were going up for reasons completely unconnected to the causes these candidates were talking about. What really happened was that Wall Street had opened a new table in its casino. The new gaming table was called commodity index investing. And when it became the hottest new game in town, America suddenly got a very painful lesson in the glorious possibilities of taxation without representation. Wall Street turned gas prices into a gaming table, and when they hit a hot streak we ended up making exorbitant involuntary payments for a commodity that one simply cannot live without. Wall Street gambled, you paid the big number, and what they ended up doing with some of that money you lost is the most amazing thing of all. They got America—you, me, Priscilla Carillo, Robert Lukens—to pawn itself to pay for the gas they forced us to buy in the first place. Pawn its bridges, highways, and airports. Literally sell our sovereign territory. It was a scam of almost breathtaking beauty, if you’re inclined to appreciate that sort of thing. The scam was a two-part squeeze. Part one was the commodities bubble, a completely avoidable speculative mania that drove oil prices through the roof. It is...

With the speculator, however, everything runs smoothly. The corn grower goes to the market with his corn, maybe there are no cereal companies buying, but the speculator takes his crop at $2.80 a bushel. Ten weeks later, the cereal guy needs corn, but no growers are there—so he buys from the speculator, at $3.00 a bushel. The speculator makes money, the grower unloads his crop, the cereal company gets its commodities at a decent price, everyone’s happy. This system functioned more or less perfectly for about fifty years. It was tightly regulated by the government, which recognized that the influence of speculators had to be watched carefully. If speculators were allowed to buy up the whole corn crop, or even a big percentage of it, for instance, they could easily manipulate the price. So the government set up position limits, which guaranteed that at any given moment, the trading on the commodities markets would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly.

On October 18, 1991, the CFTC—in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron’s letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as “bona fide hedging”—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets. In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—“and that’s being conservative,” he said. What was even more amazing is that these exemptions were handed out more or less in secret. “I was the head of the Division of Trading and Markets, and Brooksley Born was the chair [of the CFTC in the late nineties],” says Michael Greenberger, now a professor at the University of Maryland, “and neither of us knew this letter existed.” And these letters might never have seen the light of day, either, but for an accident. It’s a story that reveals just how total the speculators’ hold over government is.

What you’re doing when you invest in the S&P GSCI is buying monthly futures contracts for each of these commodities. If you decide to simply put a thousand dollars into the S&P GSCI and leave it there, the same way you might with a mutual fund, this is a little more complicated—what you’re really doing is buying twenty-four different monthly futures contracts, and then at the end of each month you’re selling the expiring contracts and buying a new set of twenty-four contracts. After all, if you didn’t sell those futures contracts, someone would actually be delivering barrels of oil to your doorstep. Since you don’t really need oil, and you’re just investing to make money, you have to continually sell your futures contracts and buy new ones in what amounts to a ridiculously overcomplex way of betting on the prices of oil and gas and cocoa and coffee. This process of selling this month’s futures and buying the next month’s futures is called rolling.

But here’s the thing: if you were just some schmuck on the street and you wanted to gamble on this nonsense, you couldn’t do it, because your behavior would be speculative and restricted under that old 1936 Commodity Exchange Act, which supposedly maintained that delicate balance between speculator and physical hedger (i.e., the real producers/consumers). Same goes for a giant pension fund or a trust that didn’t have one of those magic letters. Even if you wanted into this craziness, you couldn’t get in, because it was barred to the Common Speculator. The only way for you to get to the gaming table was, in essence, to rent the speculator-hedger exemption that the government had quietly given to companies like Goldman Sachs via those sixteen letters. If you wanted to speculate on commodity prices, you had to do so through a government-licensed speculator like Goldman Sachs. It was the ultimate scam: not only did Goldman and the other banks undermine the 1936 law and upset the delicate balance that had prevented bubbles for decades, unleashing a flood of speculative money into a market that was not designed to handle it, these banks managed to secure themselves exclusive middleman status for the oncoming flood. Now, once upon a time, this kind of “investing” was barred to institutional investors like trusts and pension funds, which by law and custom are supposed to be extremely conservative in outlook. If you’re the manager of a pension fund for Ford autoworkers, it kind of ...

the Uniform Prudent Investor Act of 1994, some form of which would eventually be adopted by every state in the union. The Prudent Investor Act was something of a financial version of the Clear Skies Act or the Healthy Forests Restoration Act, a sweeping deregulatory action with a cheerily Orwellian name that actually meant close to the opposite of what it sounded like. The rule now said that there was no one-size-fits-all industry standard of prudence and that trusts were not only not barred from investing in certain asset classes, they were actually duty bound to diversify as much as possible.

An interesting side note to all of this: if you think about it logically, there are few reasons why anyone would want to invest in a rise in commodity prices over time. With better technology, the cost of harvesting and transporting commodities like wheat and corn is probably going to go down over time, or at the very least is going to hover near inflation, or below it. There are not many good reasons why prices in valued commodities would rise—and certainly very few reasons to expect that the prices of twenty-four different commodities would all rise over and above the rate of inflation over a certain period of time. What all this means is that when money from index speculators pours into the commodities markets, it makes prices go up. In the stock markets, where again there is betting both for and against stocks (long and short betting), this would probably be a good thing. But in commodities, where almost all speculative money is betting long, betting on prices to go up, this is not a good thing—unless you’re one of the speculators. But chances are that’s not who you are in this drama. You are far more likely to be Priscilla Carillo or Robert Lukens, dealing with a sudden price hike for reasons you know nothing about.

One thing we know for sure is that the price increases had nothing to do with supply or demand. In fact, oil supply was at an all-time high, and demand was actually falling. In April 2008 the secretary-general of OPEC, a Libyan named Abdalla El-Badri, said flatly that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.” The U.S. Energy Information Administration (EIA) agreed: its data showed that worldwide oil supply rose from 85.3 million barrels a day to 85.6 million from the first quarter to the second that year, and that world oil demand dropped from 86.4 million barrels a day to 85.2 million.

The two most common culprits cited were the shaky dollar (investors nervous about keeping their holdings in U.S. dollars were, according to some, more likely to want to shift their holdings into commodities) and the increased worldwide demand for oil caused by the booming Chinese economy. Both of these factors were real. But neither was any more significant than the massive inflow of speculative cash into the market.