Financial history has nothing to compare in sophistication and complexity with the collateralised debt obligation. Yet the fevered discussion of the Securities and Exchange Commission's fraud charges against Goldman Sachs serves as a reminder that bubbles tend to follow archetypal patterns. While the courts will decide whether Goldman knowingly sold a CDO pup to IKB and others, there is a wider sense in which the recent credit bubble followed an age-old pattern whereby clever insiders are pitted against naive outsiders.
Economic historian Charles Kindleberger argued that in great financial aberrations such as the South Sea or Mississippi Bubbles a permanent group of expert insiders buys (or promotes shares) at the bottom, drives the price up and sells at the top, after which the market plunges. A larger, changing group of outsiders comes in late, buys high and sells low, before retiring hurt.
This was the refutation of Milton Friedman's famous argument that destabilising speculation is impossible in the long run because it would involve buying high and selling low. According to Friedman, anyone who did that would lose money and be wiped out. Since speculators continue to exist, they must buy low and sell high and act as stabilising speculators. Kindleberger's point was that speculators were not a single, homogeneous group: some won, some lost.