Subscribe to
Posts
Comments

Ordinary mortals are naturally inclined to be afraid of derivatives. Especially those ordinary mortals who know that the nominal value of all derivatives is around 300 trillion dollars.

But more sophisticated people would like to tell you that there is nothing to worry about. They would tell you that derivatives actually make the market safer.

Steve Randy Waldman has an excellent point by point rebuttal to those sophisticated types.

But I would like to add an observation of my own. Being an ignorant hillbilly I don’t know anything about high finance, but it does seem to me that financial innovation has historically led to disaster. Financial systems, like any other complex system, need to be beta tested to work out the bugs. The only way to do that is to let them experience disasters.

Our banking system as it now stands is the product of a lot of disasters. Our central bank and the theories that guide its operations are the product of disasters. The way that we let our currency float against other currencies is the product of disaster. The way that we run our stock market is shaped by past disasters. And I could go on and on…

Why should the derivatives market be different?

Derivatives have never been tested by a genuine financial crisis the way that our stock market and banking system have. Why should we assume (as the optimists are assuming) that the derivatives will be able to sail through such a crisis when no other financial system has managed to pull that feat off?

One Response to “A 300 trillion dollar complex system is currently in beta….”

  1. […] _uacct = “UA-1202685-1”; urchinTracker(); Map of the Ethereal Land The Ethereal Voice Front Page – Politics – Money – Knowledge – Art – Food – Fun Masthead About A 300 trillion dollar complex system is currently in beta…. By Ape Man | April 18, 2007 – 7:28 pm Posted in Category: Money Ordinary mortals are naturally inclined to be afraid of derivatives. Especially those ordinary mortals who know that the nominal value of all derivatives is around 300 trillion dollars. But more sophisticated people would like to tell you that there is nothing to worry about. They would tell you that derivatives actually make the market safer. Steve Randy Click Here to continue reading. […]

Leave a Reply