Into the Abyss: Of Ponzi Schemes and the Myth of the Self-regulating Market

[undergroundpanther]

‘Ponzi’ By Any Other Name

At the heart of the so-called ‘securitization revolution’ are the little beasts called ‘derivatives’. At its most basic a derivative is simply a financial instrument derived from other such instruments. An interesting example are ‘interest rate swaps’ whereby Companies A & B engage in a wholly fictional transaction by ‘loaning’ each other, say, $100 million, each betting on the opposite direction in which interest rates are likely to swing. The loser pays the winner the eventual difference in the rate.

The key here is that derivatives have no intrinsic value. Their value is derived from either real things or other instruments that were themselves based on real things. This pyramiding of purely fictional and speculative financial offerings is what, in all seriousness, accounts for the vast majority of market activity.

Read it all here.

http://canadiandimension.com/articles/2008/03/23/1724/

[Warpy]

1. That's what deregulation always does, folks

It lets in the thieves to start Ponzi schemes of various descriptions. When those schemes start to go, they can take whole economies with them.

If the derivatives market goes all at once, the whole world will be sitting around with crumbled financial institutions, worthless money, and no way of giving value for goods and labor.

Warren Buffett has been warning us about this for years, but it just keeps on getting worse as prices keep getting pumped with every transaction.

[HamdenRice]

2. While I agree deregulation is bad, most of that article is wrong/uninformed

The current financial crisis is horrible, but it's also scary and amazing how little the public -- even concerned journalists and commentators -- seem to understand about exactly what the crisis is, or how we got here.

About 90% of that article is just downright wrong on the facts. But then again, so is what most journalists are writing about the crisis. I was disappointed to read last week an article by Greg Palast that was even worse.

The public's complete ignorance of the nature of the problem does not bode well for the public being able to demand appropriate solutions to our problems.