Deruvatives and de-regulation
Derivatives are just symptoms of the disease, in fact in the case of the meltdown, they actually sprung up to fight the disease (risk)
Derivatives are a natural manifestation in a free market and are useful. These instruments do not exist primarily for wild-eyed speculation. They are most often tools for reducing risk. The media likes to blame things that they don't understand for occurrences that they can't explain, hoping that the audience won't figure out that they are full of sh-t. There are few, if any, members of the media that could understand what they are let alone what role they play in the markets or what role they may have played in the financial meltdown.
Derivatives can take many forms from simple to extremely complex. The financial industry looks for and hires rocket scientist (or the students that otherwise would have become rocket scientists) to help design and construct derivative products.
Contrary to what many sources (media) say, the origins of derivative are in reducing risk. Hedging. Finding a way to maintain income and / or upside potential while simultaneously reducing risk. Sounds simple enough. However, in a truly efficient market, it is next to impossible. There are no risk-less arbitrage opportunities in a liquid, efficient market. Therefore, many derivatives are highly complex and involve a number or different types of securities, tactics and strategies in order to create the desired response to market developments. Derivatives make it possible to isolate the type of risk (e. G. Interest-only or principal only) If your business has high exposure to a particular type of risk, you may want to purchase a product that would behave in a way that is counter to that risk.
Very few financial institutions take huge, naked (un-hedged) speculative positions. Even amongst hedge funds (another group the media likes to blame because they don't really know what they are or what they do) there are not as many 'cowboys' as one might think from the way the media portrays it.
Hedging products designed to make money when markets fall, usually do just that. However, if markets are flat or go up, the purchaser of those products loses money. You never hear the media complaining that investors lost money because the markets went up.
The beginning and the end of this most recent meltdown is the mistreatment of risk caused by government intervention, in the forms of Fannie & Freddie and by forcing financial institutions to make risky loans that did not promise appropriate returns as compensation for taking that risk.
Efficient markets correlate risk and return. The government created all of the profit opportunities that are being blamed on speculators, hedge funds and derivates. The govt created them by making inefficiencies in the markets.
Therefore, the banks wanted to unload them as fast as possible. To whom did they unload the risky mortgages? Fannie and Freddie - two quasi-governmental groups that would buy almost anything. Therefore, the original issuing bank was able to make its fees on originating the loan, keep what it wanted and sell the rest to F & F. This market dynamic (F & F there to buy every mortgage without question) was not a free market, nor was it efficient. If there was a buyer for dog sh-t that was always offering US$5 for every dog-pile you brought them, you could eat off the streets of Bs As. However, the owner of all that pooh might find that at some point they had too much.
For issuers that also were owners of these loans, they needed protection, ergo credit-default swaps.
Fannie Mae and Freddie Mac
Two of the major culprits in the home loan debacle were Freddie Mac and Fannie Mae. With the Democrats pushing for lower thresholds for lending and using Freddie Mac and Fannie Mae to accomplish this, as well as forcing other lenders to do the same, people who could not afford homes began qualifying for them under the new guidelines. As the thresholds kept going down more financially challenged (is that PC enough for your?) home buyers qualified and then ultimately were unable to make their mortgage payments, which is where the downward spiral began that sank the economy.
Any legislation regulating this market which leaves Freddie Mac and Fannie Mae out is like rounding up the monkeys but leaving the 900 pound gorilla free. Perhaps it has something to do with the Democrats keeping control of these two very politically beneficial entities.
Why are the taxpayers / government involved in the home loan business in the first place? I don't recall anything in the Constitution which would empower the Feds to do this. Cut Fannie and Freddie loose and let the sink or swim with the rest of the market and not depend on taxpayer dollars to support liberal political ideology.
Just my 2 cents worth.
Hey Jackson - Guess What! It Worked!
[QUOTE=Jackson]Miami Bob,
It's not a stimulus package. It's a liberal pork fantasy bill masquerading as a stimulus bill.
Thanks,
Jackson[/QUOTE]This quote from el Jefe from back in 2009 apparently needs to be retracted!
Today, the Congressional Budget Office, which is widely considered to be an authoritative, non-partisan source of objective economic analysis issued its report on the stimulus plan's impact on the economy.
Its got lots of bad news!
At least for John McCain and Jackson and everyone suffering from Obama derangement syndrome.
For Obama and the American people it actually has pretty good news.
Here is a link to the executive summary of the CBO findings:
[url]http://cboblog.cbo.gov/?p=967[/url]
The key points are:
1. The stimulus put as many as 2.8 million people to work in the first three months of this year -- and raised GDP by as much as 4.2%.
2. The stimulus lowered the unemployment rate by as much as 1.5% in the first quarter.
If anyone remembers when the package was passed it specifically made the point that it was designed to provide immediate relief to individuals and businesses who were suffering from the abrupt dislocation of the general economy caused by the global financial crisis and to stimulate future overall economic growth in the mid and long term.
It was divided broadly into three sections of almost equal worth.
* The first component was tax cuts (36% of the total package) which included one of the largest across the board cuts in individual taxes in history - worth $145 billion - and $17 billion in tax relief for small businesses who were being devastated by the rapid fall-off in consumer demand.
* Second (about 25% of the total) was a series of elements aimed at assuring the basic "safety net" for individuals, companies, states and localities already in place was adequately funded. This included extension of unemployment benefits; expanded eligibility for food stamps for middle class families falling back into poverty; and aid to states facing budget shortfalls as tax revenues began to fall dramatically and medicaid liabilities increased.
* The third component (about 39% of the total) was for infrastructure projects including rebuilding highways, bridges, schools, mass transit facilities, and creating more renewable energy. This component was never sold as an immediate palliative.
Of course, the package could have been structured differently, but what is now beyond dispute is that just as TARP was effective in keeping the international financial system from self-destructing, the stimulus has been effective in halting the slide of the general economy and changing its direction towards growth.
Unfortunately, for many contributors to this page, opinion replaces analysis, points of view substitute for facts, and ad hominem diatribes replace critical argument. Much of what is written about the economic matters represent the ideology of the writer, rather than any expertise in macro-economic theory or reality. In addition, the animus toward Obama - the root of which remains a bit of a mystery - colors (pardon the word chosen) the criticisms of Administration policies. It's pretty sad.
Fortunately, the CBO has done a public service today and the naysayers here and elsewhere can carp, but they have zero credibility as compared to knowledgeable, professional, unbiased experts who provide fact-based analysis.
