In Mel Brooks's immortal film (and musical) The Producers the title characters have an epiphany when they realize that, under the right conditions, they can make more money from a flop show than from a hit.
This seems to be exactly what happened in the 2000s when hedge funds, led by one called Magnetar placed more money into the hedges than into the investments. In short, they stood to make more money if a fund failed than if it paid off. Guess what happened next?
In a joint effort between This American Life, Planet Money and Pro Publica, journalists detail here how Magnetar engineered CDOs to be as risky and likely to fail as possible.
But of course, Greenspan and all the "experts" claim they couldn't see the disaster coming--that nobody could have. Really? How hard is it to understand that when you loan money to people who can't pay it back that something bad will happen?
One of the salutary financial reforms of the Reagan era was the imposition of "at risk" rules. What can be more commensensical than the idea that you shouldn't reap more benefit from destroying wealth than you make from creating wealth?
This is, of course, a crazy Communistic left-wing idea. Capitalism as a means to create wealth! I am such a Red!
You can hear the story in entertaining and lively form in the first half of this broadcast (called "Inside Job"), available for free through Friday, April 16.