The derivatives market is a pinball machine - useful metaphor

[MostlyAmused]

From my personal blog today:

My latest useful metaphor is the pinball machine. The financial speculators start with a marble (something with real value, like my house). I threw the house into play when I took out the mortgage. Real marble, collateralized loan. The derivatives market players operated the flippers. Every slice, dice, trade, credit swap bumper they managed to hit added a zero onto their point total. At the end of the day, it's still just a marble, still the same real value of of a genuine asset, and it's eventually going to fall out of play, whether I pay off the mortgage or default. The gamers don't really care which -- it's not the marble that matters to them. In the game, all that matters is how long they can keep it in play, how many posts they can hit, how many trades they can make -- they are just after a big point total, signifying nothing real, that all the other pinball players will jump up and down about, knowing there's another marble where that one came from. They know eventually it will come to game over, but if their meaningless number is big enough, they will get a free game.

I think that's where we are now, and the only way to get out is to pull the plug.

Throwing a trillion new points of money that doesn't exist to be spread around won't make anything better, no matter what rules are put into play. The only thing that will help anyone trying to make it in real daily life in the real world of food, clothing, shelter, and transportation of real things that really exist from one real place to another is to separate the game players from the real-live people. Let the gamers amuse themselves all they want, but allow real people to keep their houses and businesses and futures out of play.

more:
http://throughthefears.blogspot.com/

[Warpy]

1. Sort of, it's a casino

Basically a derivative is a bet. If the bet paid off, the derivative generated income. If the bet didn't pay off, the derivative didn't generate income. However, both derivatives were numbers on the asset side of the balance sheet.

Now the casino has gone dark, the bookies have left town, and those numbers everybody bought are just numbers on a piece of paper. There will be no more payoffs and the balance sheets are in deeply negative numbers once the bets are subtracted from the assets column.

Institutions have gone bankrupt over placing bets. It's a common enough phenomenon for those of us who live in gambling states. An infusion of cash will shore up the balance sheet and allow a compulsive gambler to keep his mortgage paid, but unless something is done to stop the gambling, the whole thing will just happen again next year.

That's pretty much what we're facing and it's putting us between the devil and the deep blue sea. If Congress manages the wisdom to offer a small down payment on the bailout until the new Congress sits or if they put a lot of very heavy strings on this bailout, we might be able to avert disaster.

Those are big "ifs" with this Congress, though.

[soothsayer]

2. Sort of. It's a casino where there's a craps game going on, and on the balcony above

someone is betting on the outcome of the craps game, and on the floor above that, someone is betting on the outcome of THAT bet, and on the floor above that, someone is betting on the outcome of THAT bet.

[Warpy]

3. I think that between us

we have given a very good description of the "crisis."