I am usually loath to quote again this ignoramus called Sanjiv Sabhlok from FTI, who though he holds a degree in economics from a University in USA, is direly in need of going back to the school of real economics . But he is not alone in furiously peddling economic drivel. So he serves as a very good specimen of how little factual basis and reasoning is contained in many of the libertarian economic views.
The link below contains a plagiarized pitch for derivatives from this worthy
http://sabhlokcity.com/2011/10/info-for-the-occupy-wall-st-movement-entrepreneurs-get-only-2-per-cent-of-the-wealth-they-produce/comment-page-1/#comment-64577
I reproduce below my riposte to his misguided pitch
Apropos derivatives :As quoted by you
"These are HEDGING instruments for future risk. They smooth and minimise risk. They also allow people to speculate on future asset prices, thus deepening and thickening the financial markets, permitting a range of investment options suited to individual risk preferences. The “written” value of these instruments is far greater than global GDP, but that is because these incorporate entire exchange values between parties to the instrument. Particularly when you consider future asset values, their total nominal value will naturally seem very “inflated”."
I will reserve my detailed opinion till I can go thru the references cited by you. But based on my knowledge and information of the current trends in derivatives, I feel less inclined to agree with the above sales promotional pitch about derivatives driven speculation deepening, broadening and thickening financial markets.
If I am permitted an analogy from the insurance industry, the obverse side of speculation in the coin of financial arrangement is the 'absence of insurable interest'. In the interests of advancing the objective of promoting depth, breadth and liquidity of financial transactions/system diluting the principle of existence of insurable interest is inevitable. But it is necessary to have limits on how much this tenet can be compromised.
For example the GDP size of major economies do not exceed 100 T. When compared with the size of the 650 T, it seems a leverage of 6.5 which may seem deceptively manageable. But if it is compared with the US real/physical economy ( approx 10 T if the financial economy is excluded), the leverage will be 65 times, which is scarily huge and disproportionate. Even the argument of exchange values between multiple parties is accepted, the size of option/instrument value is increasing not only because of multiplicity of counter-parties but due more to layering of speculative bets.
There is another feature that is somehow escaping the attention of economic and regulatory experts, which is that opaqueness and complex structuring of these instruments is in fact becoming their defining feature.
How can opaque and complex instruments smooth and minimize risk?.
If the MBS fiasco has been blamed on lax housing regulation, then what about the LCTM hedge fund collapse event. That is considered a classic case study in how complex layered instruments can trigger cascading defaults when bets start unwinding. The argument of future values of underlying assets causing inflation in the designated value of derivatives is not convincing either since that will raise the question of methodology of estimating future values of commodities/asset. What conservative or reasonable discounting or NPV method would justify a future value of even 5/10 times the current value of an asset, let alone higher ones that have ballooned the size of this market
My point is that regulation apart, there is a serious need to rethink the whole economic and social utility of this kind of shadow economy or banking system. This shadow economy thrives on opacity and secrecy.
You cannot regulate something that is opaque and non-transparent.
It is no surprise then that the financial industry always protests/browbeats any attempt to regulate the derivatives market. The few rare attempts to look into any financial reform is always painted as an effort/conspiracy to strangle the liquidity and depth of financial markets
PS: Expectedly the 'great expert' on derivatives had no answers to any of these questions or posers. It is really a tragedy that 'economists' like him have very little respect for facts, criticism or knowledge of critics.
The link below contains a plagiarized pitch for derivatives from this worthy
http://sabhlokcity.com/2011/10/info-for-the-occupy-wall-st-movement-entrepreneurs-get-only-2-per-cent-of-the-wealth-they-produce/comment-page-1/#comment-64577
I reproduce below my riposte to his misguided pitch
Apropos derivatives :As quoted by you
"These are HEDGING instruments for future risk. They smooth and minimise risk. They also allow people to speculate on future asset prices, thus deepening and thickening the financial markets, permitting a range of investment options suited to individual risk preferences. The “written” value of these instruments is far greater than global GDP, but that is because these incorporate entire exchange values between parties to the instrument. Particularly when you consider future asset values, their total nominal value will naturally seem very “inflated”."
I will reserve my detailed opinion till I can go thru the references cited by you. But based on my knowledge and information of the current trends in derivatives, I feel less inclined to agree with the above sales promotional pitch about derivatives driven speculation deepening, broadening and thickening financial markets.
If I am permitted an analogy from the insurance industry, the obverse side of speculation in the coin of financial arrangement is the 'absence of insurable interest'. In the interests of advancing the objective of promoting depth, breadth and liquidity of financial transactions/system diluting the principle of existence of insurable interest is inevitable. But it is necessary to have limits on how much this tenet can be compromised.
For example the GDP size of major economies do not exceed 100 T. When compared with the size of the 650 T, it seems a leverage of 6.5 which may seem deceptively manageable. But if it is compared with the US real/physical economy ( approx 10 T if the financial economy is excluded), the leverage will be 65 times, which is scarily huge and disproportionate. Even the argument of exchange values between multiple parties is accepted, the size of option/instrument value is increasing not only because of multiplicity of counter-parties but due more to layering of speculative bets.
There is another feature that is somehow escaping the attention of economic and regulatory experts, which is that opaqueness and complex structuring of these instruments is in fact becoming their defining feature.
How can opaque and complex instruments smooth and minimize risk?.
If the MBS fiasco has been blamed on lax housing regulation, then what about the LCTM hedge fund collapse event. That is considered a classic case study in how complex layered instruments can trigger cascading defaults when bets start unwinding. The argument of future values of underlying assets causing inflation in the designated value of derivatives is not convincing either since that will raise the question of methodology of estimating future values of commodities/asset. What conservative or reasonable discounting or NPV method would justify a future value of even 5/10 times the current value of an asset, let alone higher ones that have ballooned the size of this market
My point is that regulation apart, there is a serious need to rethink the whole economic and social utility of this kind of shadow economy or banking system. This shadow economy thrives on opacity and secrecy.
You cannot regulate something that is opaque and non-transparent.
It is no surprise then that the financial industry always protests/browbeats any attempt to regulate the derivatives market. The few rare attempts to look into any financial reform is always painted as an effort/conspiracy to strangle the liquidity and depth of financial markets
PS: Expectedly the 'great expert' on derivatives had no answers to any of these questions or posers. It is really a tragedy that 'economists' like him have very little respect for facts, criticism or knowledge of critics.
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