8 ms·

I think it's still relevant that they show it because it illustrates the irrationality of the situation we're in. I don't see how the notional value can fully c

I think it's still relevant that they show it because it illustrates the irrationality of the situation we're in. I don't see how the notional value can fully cancel out unless it's possible to sell multiple contracts on the same underlying asset. If you want to sell your house, you can't just sell it to two different people at the same time using different contracts. Also, you can't sell your house to someone and also simultaneously rent it out to someone else either... Ultimately there can only be one legitimate contract over any given asset at any given time. It seems that the financial system has legitimized scams by allowing people to sell rights to assets which they do not actually own under the pretext that they will make the transactions necessary to honor the contract 'if necessary'... But it has been proven time and time again that sometimes they cannot honor the contract due to systemic risks... So the contract is bs; people should not be allowed to sell contracts when they cannot provide 100% guarantee that they will be able to honor it... The looming collapse of the financial system is not an excuse to not honor a contract! People should not rely on taxpayer funded bailouts to protect themselves from systemic risks. It makes complete sense to show the notional value because it shows the extent of the deception. It's not hard to imagine how a tiny change in consumer habits could create huge asset squeezes and liquidity shortages. The value is just not there.

CryptoPunk 6y ago
In principle, the value of derivatives can represent nothing more than the value that people collectively place on options backed by the collateral of the options and the credit of the option guarantors. This valuation, in the event that it is not a massive miscalculation by the market, reflects the sophistication of the market in being able to incentivize cooperative behavior like contract fulfillment, through phenonema like reputation, and mechanisms like reputation feedback. Financial credibility extending to more sophisticated contracts is a genuine expansion of economic resources, that enables more effective economic coordination. It is not a scam, and the assets that emerge from it are not 'fake' wealth.
- carapace 6y ago
  But doesn't that line of reasoning fall apart in the face of things like the LIBOR scandal?
  - CryptoPunk 6y ago
    That's why I said "in principle". In practice, plenty of fraud/miscalculation/complicating-factors exist. I was simply arguing that derivatives are not, by virtue of their fundamental properties, illusionary or non-productive wealth.
    - carapace 6y ago
      Ah, cheers.
- kenny87 6y ago
  Frankly, this kind of hubris is dangerous. The point here is not that financial instruments are 'fake' wealth or 'nothing more' than the value that people put on real assets, that is the entire crux of the matter. You literally require expertise in higher maths to understand the valuations. And even those with that understanding sometimes fail to manage the risk. The guys who literally wrote the book on modern finance bought the global financial system to its knees b/c of their mismanagement [0]. The systemic risks that these insanely complex valuations pose to the economy are real and matter. I'm talking about food, housing, education, infrastructure, health care ... real things the matter for long term growth. This concept needs to be thoroughly appreciated. The notional values here are important b/c they are powerful indicator of the impact of default on the real economy [1]. The impact is in fact so great, that the Fed is willing to print trillions and trillions of $$$ to save financial systems from their failure. But a maxim of economics is that "There ain't no such thing as a free lunch." And right now our government is literally feeding the capitalists while watching millions of people go w/o food, housing, health care. It's egregious injustice and insult to people of Enlightenment everywhere. [0] https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management [1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475366 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475366
  - CryptoPunk 6y ago
    The systemic risk argument is absurd. The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for. In the absence of the government bodies that socialize the losses of irresponsible actors, those actors who take on imprudent risks would see the share of the financial market that they control steadily shrink at the expense of those who do not. The suspension of this market feedback mechanism is what increases the risk of financial crisis. For example, the FDIC has been found to stimulate risk-taking and thereby contribute to more systemic risk and more frequent and severe financial crises. [1] For another example, in the wake of the 2008 financial crisis, well-capitalized players like Walmart, which was expanding its banking activity via its Sam's Club lending, were well positioned to replace the incumbent Wall Street firms as major lenders, but that was forestalled by Congress and the Federal Reserve socializing the losses of the major financial institutions with a bailout and prohibiting nonbanking parties from providing banking services. [2] >>And right now our government is literally feeding the capitalists while watching millions of people go w/o food, housing, health care. Agreed. The Central Bank is an engine for corruption and centralization of power. I disagree that the solution is more cookie-cutter rules that violate the freedom to contract and centralize power in the hands of powerful regulatory body subject to regulatory capture - which very well could have been the principal factor behind regulators stopping Sam's Club from expanding its lending activity, considering the banks' lobbying activity against it. The solution is to stop creating moral hazard with a Central Bank that holds the exclusive power to create the national currency and allocate it to the private parties of its own choosing. [1] https://www.nber.org/papers/w22223 https://www.nber.org/papers/w22223 [2] https://www.nytimes.com/2007/03/17/business/17bank.html https://www.nytimes.com/2007/03/17/business/17bank.html

CryptoPunk 6y ago

In principle, the value of derivatives can represent nothing more than the value that people collectively place on options backed by the collateral of the options and the credit of the option guarantors. This valuation, in the event that it is not a massive miscalculation by the market, reflects the sophistication of the market in being able to incentivize cooperative behavior like contract fulfillment, through phenonema like reputation, and mechanisms like reputation feedback. Financial credibility extending to more sophisticated contracts is a genuine expansion of economic resources, that enables more effective economic coordination. It is not a scam, and the assets that emerge from it are not 'fake' wealth.

carapace 6y ago
But doesn't that line of reasoning fall apart in the face of things like the LIBOR scandal?
- CryptoPunk 6y ago
  That's why I said "in principle". In practice, plenty of fraud/miscalculation/complicating-factors exist. I was simply arguing that derivatives are not, by virtue of their fundamental properties, illusionary or non-productive wealth.
  - carapace 6y ago
    Ah, cheers.
kenny87 6y ago
Frankly, this kind of hubris is dangerous. The point here is not that financial instruments are 'fake' wealth or 'nothing more' than the value that people put on real assets, that is the entire crux of the matter. You literally require expertise in higher maths to understand the valuations. And even those with that understanding sometimes fail to manage the risk. The guys who literally wrote the book on modern finance bought the global financial system to its knees b/c of their mismanagement [0]. The systemic risks that these insanely complex valuations pose to the economy are real and matter. I'm talking about food, housing, education, infrastructure, health care ... real things the matter for long term growth. This concept needs to be thoroughly appreciated. The notional values here are important b/c they are powerful indicator of the impact of default on the real economy [1]. The impact is in fact so great, that the Fed is willing to print trillions and trillions of $$$ to save financial systems from their failure. But a maxim of economics is that "There ain't no such thing as a free lunch." And right now our government is literally feeding the capitalists while watching millions of people go w/o food, housing, health care. It's egregious injustice and insult to people of Enlightenment everywhere. [0] https://en.wikipedia.org/wiki/Long-Term_Capital_Management https://en.wikipedia.org/wiki/Long-Term_Capital_Management [1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475366 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475366
- CryptoPunk 6y ago
  The systemic risk argument is absurd. The risk posed by any financial asset is not distributed uniformly across the economy. Its impact on any party is proportional to their direct and indirect exposure to that asset, which is something that they control and have to take responsibility for. In the absence of the government bodies that socialize the losses of irresponsible actors, those actors who take on imprudent risks would see the share of the financial market that they control steadily shrink at the expense of those who do not. The suspension of this market feedback mechanism is what increases the risk of financial crisis. For example, the FDIC has been found to stimulate risk-taking and thereby contribute to more systemic risk and more frequent and severe financial crises. [1] For another example, in the wake of the 2008 financial crisis, well-capitalized players like Walmart, which was expanding its banking activity via its Sam's Club lending, were well positioned to replace the incumbent Wall Street firms as major lenders, but that was forestalled by Congress and the Federal Reserve socializing the losses of the major financial institutions with a bailout and prohibiting nonbanking parties from providing banking services. [2] >>And right now our government is literally feeding the capitalists while watching millions of people go w/o food, housing, health care. Agreed. The Central Bank is an engine for corruption and centralization of power. I disagree that the solution is more cookie-cutter rules that violate the freedom to contract and centralize power in the hands of powerful regulatory body subject to regulatory capture - which very well could have been the principal factor behind regulators stopping Sam's Club from expanding its lending activity, considering the banks' lobbying activity against it. The solution is to stop creating moral hazard with a Central Bank that holds the exclusive power to create the national currency and allocate it to the private parties of its own choosing. [1] https://www.nber.org/papers/w22223 https://www.nber.org/papers/w22223 [2] https://www.nytimes.com/2007/03/17/business/17bank.html https://www.nytimes.com/2007/03/17/business/17bank.html