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ZorbaTHut  1yr ago (text post)   35371 thread views

Culture War Roundup for the week of September 26, 2022

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People gambling money on various esoteric financial instruments do not contribute to growth.

Capitol allocation is important to growth, and all investment activity, even derivatives, are capital allocation.

Yes, but adding extra several layers of gambling doesn't help and destabilises everything. Did we learn nothing from the financial crisis ?

Did the elaborate financial products whose risks were not properly understood help in any way, or were they merely helping to set up the system for a failure ?

Investments involve risk, and the point of derivatives is to allocate that risk to the investors most willing and able to accept that risk. They exist for the same reason insurance exists.

If the instruments that are supposed to help allocate risk instead create extra risk because they're employed in an irresponsible way, what then ?

"Extra layers of gambling" seems rather arbitrary. Are calls and puts extra included in this? They're contracts that grant the right to sell or buy securities at a certain price. They also help to check prices that are either too high or too low. If there's a buying or selling panic you can contradict the crowd, help to nudge the price, and make money if you turn out to be right.

A credit default swap is just insurance.

The financial instrument is easy to point to and say "it's too complicated," but no one is forced to trade any particular instrument. The people that traded them almost certainly understood what they were, they just had little incentive to care about the risk they were exposing their institutions to.

The people that traded them almost certainly understood what they were

They didn't. Nobody understood the risks of the pooled mortgages failing.

Or rather the relevant credit rating agencies lied / didn't care, the banks who were making them didn't want to and the customers were too stupid.

They convinced themselves that the odds of a large package of mortgages failing were minimal because not enough of them could go into nonpayment at once, so even a financial instrument made out of a lot of dogshit mortgages was actually not risky because odds of mortgages failing were independent, or some BS like that.

You guys don't remember any of this ?

A credit default swap is just insurance.

Yeah, sure. But if you're buying insurance on stuff you don't own, in a completely disproportionate amount, because you see the CDS's as being just free money, and then it blows up, you could argue that it was just stupid gambling.

Are calls and puts extra included in this?

Nothing wrong with that. But why is the derivatives market apparently something like an order of magnitude bigger than planetary GDP ?

Good thing that’s a separate argument no one is here discussing

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