Courtesy Reuters

In his recent essay “Never Saw It Coming” (November/December 2013), Alan Greenspan makes two central arguments: first, that virtually no one foresaw the 2008 U.S. financial crisis and, second, that irrational “animal spirits” were the root cause. If true, these propositions would absolve policymakers such as Greenspan of blame. But neither holds water.

The truth is that many experts worried about the U.S. housing bubble and predicted a crash, even if they couldn’t pin down its timing or severity. As early as 2002, Congress summoned Greenspan himself to discuss “the possible emergence of a bubble in home prices,” a concern he repeatedly dismissed. A year later, the economists Robert Shiller, who won last year’s Nobel Prize in Economics for his work on financial crises, and Karl Case voiced just that worry. Also in 2003, 50 of the top U.S. newspapers ran a combined 268 stories referencing a “housing bubble.” By 2005, they had run an additional 1,977 such stories.

What turned the eventual bursting of that bubble into the worst financial crisis since the 1930s was not animal spirits but unregulated derivatives -- complicated financial instruments whose value is “derived from” an underlying asset. Some derivatives, such as corn futures, can help

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  • RICHARD KATZ is Editor of The Oriental Economist Report and a correspondent for Japan’s Weekly Toyo Keizai.
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