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Do you own a house, car, or anything else with a note on it? Do you work for a company or government entity that has to finance projects? The value,loans, bonds

Do you own a house, car, or anything else with a note on it? Do you work for a company or government entity that has to finance projects? The value,loans, bonds, and other debt instruments add is absolutely massive.

jazzyk 11y ago
You are talking about credit - financing infrastructure, tooling, other investments. Yes, the value is definitely there. The problem is, most of the recent "innovations" do not add any value to the economy. What value did Credit Default Swaps (CDS) ever bring to the economy? How does high-frequency trading (HFT) benefit the society?
- nemo44x 11y ago
  You're right in that some instruments don't really add value. They're a bet. Credit default swaps for mortgages didn't even exist really until some smart speculators noticed that the bond market for mortgages was unstable (and full of deceit) and only needed a bit of default to create a cascading waterfall of default which nearly took down the entire financial system. Honestly, CDR's were a good idea but it made no sense for the same banks to sell them that were also baking the mortgages. It would be like selling insurance on your own car. If you crash you are out a car and have to pay someone else! It would have made sense for banks to hedge their mortgages by buying CDR's from other investors. But then, that would have affected their bottom lines and they just plain got greedy. HFT is debatable as many claim it creates liquidity. I'm not sure I buy that but I also wouldn't confuse HFT with financial instruments. For instance, packaging mortgages into rated bonds of various risk tranches in the 1970's was a brilliant innovation which enable more people to qualify for loans as their risk was distributed and sliced up among many parties. Of course, that system broke down after being abused - but the initial concept still survives and is remarkable. Other instruments like derivatives allow for affordable hedges, the ability to buy and sell at a future price you want or collect premium on that offer. They aren't just for speculators.

jazzyk 11y ago

You are talking about credit - financing infrastructure, tooling, other investments. Yes, the value is definitely there. The problem is, most of the recent "innovations" do not add any value to the economy. What value did Credit Default Swaps (CDS) ever bring to the economy? How does high-frequency trading (HFT) benefit the society?

nemo44x 11y ago
You're right in that some instruments don't really add value. They're a bet. Credit default swaps for mortgages didn't even exist really until some smart speculators noticed that the bond market for mortgages was unstable (and full of deceit) and only needed a bit of default to create a cascading waterfall of default which nearly took down the entire financial system. Honestly, CDR's were a good idea but it made no sense for the same banks to sell them that were also baking the mortgages. It would be like selling insurance on your own car. If you crash you are out a car and have to pay someone else! It would have made sense for banks to hedge their mortgages by buying CDR's from other investors. But then, that would have affected their bottom lines and they just plain got greedy. HFT is debatable as many claim it creates liquidity. I'm not sure I buy that but I also wouldn't confuse HFT with financial instruments. For instance, packaging mortgages into rated bonds of various risk tranches in the 1970's was a brilliant innovation which enable more people to qualify for loans as their risk was distributed and sliced up among many parties. Of course, that system broke down after being abused - but the initial concept still survives and is remarkable. Other instruments like derivatives allow for affordable hedges, the ability to buy and sell at a future price you want or collect premium on that offer. They aren't just for speculators.