It’s The Derivatives, Stupid!
Paraphrasing the famous Clinton campaign quote from the 90′s seems like a good way to introduce the topic of derivatives and why we should pay attention to them.
Listen, with all the focus recently on Obama’s stimulus package and his – unfortunate – pandering to stalwarts in the investment business, the reality is that the global economic crisis stems from one central fact: over-valuation of real estate created a market for exotic investment schemes that outpaced the value of the collateral. It should have been restricted.
Now, the real estate values are receeding – at a loss to many – but the huge debt booked to defaults and extrapolated risk insurance (CDOs) has forced anyone with a ledger to curtail all but the most necessary outlay (spend).
This is now true for everyone (consumer, business, investment).
An excellent article by Thomas Kostigen at Marketwatch got me thinking about the meme floated recently that poor house buyers who couldn’t afford the mortgages they got are not actually victims of banks but the perpetrators of this mess. Blame them the banks say!
But as you dissect the history of deregulation of financial markets in the late 90s and look at the explosive growth of real estate valuation as part of the repackaged securities sold to investors, and their attendant default risk insurance (a numbers game if ever there was one), it becomes clear that poor homeowners looking for a small piece of the pie are the least of our shared problem.
The root system is derailed. A clear course of regulated output, for at least the next 10 years, is necessary to restart confidence, organize assets and assign funding to essential components of our civilizations.
It’s not the economy, it’s the derivatives, stupid! Get rid of them!
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