What's really burning down the financial house

[n2doc]

Derivatives are out of control. Time for adult supervision.

By Mark Lange
from the November 5, 2008 edition

SAN FRANCISCO - The most pressing business for the presidential transition team? Forget the customary interlude measuring the White House for drapes. Make it flights to Washington to meet with Treasury and Federal Reserve leadership, to begin restoring confidence in the financial system.

This can't wait. It begins with the recognition that, behind all of the explanations and recriminations, what ultimately brought down the financial house were volatile investments known as "derivatives" – idiosyncratic and inscrutable securities "derived" from other securities, such as bundles of home mortgages. If we fail to regulate them, we will continue to invite the financial equivalent of arson.

The value of these financial abstractions has grown fivefold since 2002, to at least $531 trillion today. That's nearly 10 times the total output of all of the goods and services the entire world produced last year.

Think of derivatives as computer-generated casino wagers. Upper-class slot machines, video games played by Wall Street's Masters of the Universe, they amount to bets placed on the future direction of interest rates, stocks, commodities – any asset or investment. Their aim is to cover losses, or reap gains from the bad bets of others.

more:

http://www.csmonitor.com/2008/1105/p09s02-coop.html


most telling line:
This was more than a matter of low rates, loose credit, and lax regulation, as former Federal Reserve Chairman Alan Greenspan almost alluded to last month. We got into this mess through a deliberate obstruction of regulation – a dogmatic dereliction of duty on the part of the Fed.

[aquart]

1. Obstruction? They voided the rules.

And I have yet to hear of a single piece of legislation restoring the illegal status of derivatives. So nobody is serious about cleaning up this mess so far as I'm concerned.

[AngryAmish]

2. This is a terrible explanation of derivities

Farm commodity futures are derivatives. Options are derivatives.

Credit default swaps are a form of derivitive. These need to be regulated.