Reply to Barney Frank is being quite candid

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[quote=Anonymous][quote=Anonymous]Actually, derivatives have done a lot for the real economy.  They allow airlines to stabilize the price of their fuel and wholesale bakeries the cost of their flour, make farmers and ranchers less susceptible to fluctuations in the prices of the goods they produce, protect businesses that export and/or import from being jerked around by changes in foreign exchange rates, allow banks to make fixed rate loans that real economy borrowers prefer because they are easier for them to manage rather only offering floating rate loans, etc.

The derivatives that did not do well in the crisis were exclusively credit derivatives, actually more of an insurance product purchased almost exclusively by financial institutions, noted early and exploited completely by AEG, which ultimately did not have the wherewithal to make good on all the credit derivatives they sold.

Overall, derivative books are dominated by interest rate and foreign exchange derivatives, and to some extent commodity derivatives.  As a percentage of the notional amounts of derivatives, which PP uses, credit derivatives today are actually quite small.  It is unfortunate that legislators and the population more broadly are unable to distinguish between credit derivatives and the rest of the derivatives, making it much trickier for banks to offer these latter derivatives to their real economy customers.

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If it's playing "hide the marble" with risk, that needs to be far more transparent and far more closely regulated.  Clearly credit derivatives turned out to be a huge problem and a very bad idea.  Clearly the market was not able to self regulate.[/quote]

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