Republicans weren’t in charge of Iceland, Scotland, or other European countries. If deregulation is the crime then it was one practiced internationally.

The other factor not being mentioned is complexity. A year ago the Economist magazine mused about the frightening complexity of CDS instruments, and of the tangled chains of cross-investments between banks. The system had reached a point where no one really understood who owned what risk.

But as you have pointed out, that is overshadowed by the market for derivatives and especially, CDSes. This is a $US60 trillion market for credit enhancement, entirely unregulated, based on instruments that fewer than 500 people on the planet understand. All that’s left is for the conspiracy theorists to ask, why was Lehman Brothers the sole investment house hung out to dry right before the Calvary arrived? And surely in some backroom deal there was dark laughter over those silly Icelanders and how they were getting taken for a ride.

There was an October surprise, and we finally know who the terrorists are. Meanwhile, the Commodity Futures Modernization Act of 2000 is still law, the Glass-Steagall Act of 1933 is still repealed, and Generalissimo Francisco Franco is still dead.

Well yes there was that legislation in 2000. But who was in charge of our Treasury and who appointed the head of the Federal Reserve Board in the years 2001-2008? A Republican administration.

During that period of time Sub-prime backed mortgage paper swelled, credit default swaps increased, Auction-rate securities increased (and were used as the basis for money market funds, some of which have defaulted). The SEC allowed Wall Street firms to practice what was called “voluntary regulation.” The Federal Reserve Board failed to find out that some banks had leverage of 33-to-1. The SEC failed to find out that some investment banks and insurance companies were holding suspect assets in “off balance sheet” companies.

And no one in the US Government paid much attention to credit default swaps or derivatives in general. They had the attitude that the derivatives and the situation in general would take care of themselves and itself. Laissez Faire, I suppose.

Who is responsible for that? Not the Democrats. They were not in charge of the executive branch, the Fed, the SEC, and not even Congress until 2006. However, the Democrats did call repeatedly for tighter regulation of commercial mortgage companies, and the Republicans turned them down.

So far as CDSes go, my understanding (based on wikipedia and NPR’s Planet Money podcast), is that non-regulation of CDSes was tacked on to an omnibus spending bill in late 2000, which passed unanimously in the Senate and overwhelmingly in the House (http://thomas.loc.gov/cgi-bin/bdquery/z?d106:HR04577:@@@L&summ2=m&). You can maybe point to chicanery by the Republican-led Congressional leadership jamming it in at the end of a session, but I think it’s more likely that stuff like this was unobjectionable at the time … After all, the economy was riding high under the sage guidance of Alan Greenspan.

Despite Warren Buffet’s dire warning around 2002, I don’t know of any political efforts on either side of the aisle to regulate the CDS market (though these may exist).