Kass: Blinded by the Derivatives Boom

In time, the need for speed had as its outgrowth the loss of common sense, particularly in lending. Subprime and no-/low-documentation lending gained share of the total mortgage market, and speculators/investors, drawn to those riches of flipping and daytrading homes, began to stretch home prices to levels well beyond affordability and reason.

In time, the unintended consequence was literally a very shaky foundation to the residential real estate market and to the derivative products into which the subprime loans were dumped.

Over in equities, a new breed of stocks (energy, infrastructure, metals, emerging markets, etc.) flourished and took center stage during the synchronized worldwide economic growth boom and personal consumption binge -- and these sectors were capable of making the sort of broad and parabolic moves that rivaled the AOLs and Amazons (AMZN Quote) of the last decade.

As an aside, and for good measure, we can add the anointed ones -- Apple (AAPL Quote), Google (GOOG Quote) Research In Motion (RIMM Quote) and Baidu (BIDU Quote) -- which prospered by taking share from less innovative and less thoughtful competitors.

Meanwhile, other secondary deleterious influences were "emerging," too. Although, prima facie, these influences were positive for the markets -- that is, as investors easily marginalized the U.S.' loss of its competitive edge in producing goods for worldwide consumption -- they were destined to hold some negative consequences down the road.

The most important was the emergence of India and China as world economic powers and the concomitant dive in the U.S. economy's currency and economic standing, which buoyed the demand for basic materials as those countries' infrastructure developments began to take hold.

That rising demand served to have the adverse consequence of raising commodity prices around the world -- and with it, attendant inflation and higher costs for manufacturers. Other influences during this period, such as the U.S.' reliance on imported oil, sowed the seeds for higher noncore inflation.