Derivatives: A $700+ Trillion Bubble Waiting To Burst

[Jack's Creation]

To prove your point, maybe you can give an example of a large scale market that works without central regulation?

The international antique trade, totally unregulated.

[iserlohn]

Of course relationships are a market. Every single exchange between all people, be it conversation, actions, or anything, is a trade- the only question is whether that trade is part of one big market or part of one of billions of small ones - the same question, incidentally, that exercises the minds of competition regulators in every industry across the globe.

It is this sort of sloppy (mechanistic arithmetic) thinking that causes bad government. Everyone should appreciate that we don't need any money at all for a market to exist, all you need is an exchange of something. Value exists in the minds of the traders whether a currency value is put on something or not.

First, please stop putting words in my mouth, I never said that we need money for a market to exist

It's not the size that we're talking about, it's the nature. Mere interaction between people is not a market. Promises which may constitute consideration in contract law is often deemed to be a "social arrangement" by the courts if the parties did not have intent on creating legal relations. There is a reason for this. In common law jurisdictions, contracts are binding upon the parties when there is an intent to trade (for a specific product, or service) and when there is an exchange of promises (ie. consideration). When the contract is formed, whether it be oral, or written, or implied through action, both parties have to abide by the law, which is just one form of regulation.

Without the law, there is no market. Everything is fair game as there are no rules. Who will enforce the contract, who will arbitrate? Who will keep order when people improperly use force? When we accept that the market is not the natural order, but rather that trading is an activity that is made possible by social order, then we can start to understand where markets fit in the grand scheme of things.

What is baffling is the number of people that put blind faith in markets. It's the same type of people that believe in anarchism. Just because trading is a mutually beneficial emergent behaviour when a certain set of conditions in society arise, does not make unfettered trading in all it's glorious forms the natural order nor a panacea for our ills.

As is proven time and time again, markets do not work in every situation, and there are a range of conditions in which only if they are met can the market be effective. In our little crisis in the past year or so, a big part of the problem is moral hazard, asymmetrical information and understanding of the risk of instruments being sold. This, like the relative power that participants have in the market, can be solved through regulation, easily.

Don't jump to the conclusion that I'm anti-market. I'm not. On the contrary it is those that sing the praises of market mechanisms being able to find the optimal equilibrium in everything that is blinded by their own zealotry. I am merely pointing out the widely accepted fact that in order to preserve a market-based society, one has to temper the extremes and keep it within the boundaries of effectiveness.

[iserlohn]

The international antique trade, totally unregulated.

One is quite heavily regulated and the other is criminal. Which one are you talking about?

[Lepista]

ok, when I joined HPC, £1 billion seemed like alot. then trillion came into play.

Now we're talking about fractions of thousands of trillions....

What is the term for 1,000 trillion?

A Blair? a Brown? A complete ******up?

[Guest Steve Cook]

We have green shoots of recovery there is nothing to worry about.

Do you seriously think greed overcomes common sense?

One man's "common sense" very often is another man's "greed"

Edited April 21, 2009 by Steve Cook

[athe]

To prove your point, maybe you can give an example of a large scale market that works without central regulation?

Bakaara Market

[iserlohn]

Bakaara Market

Absent of the government, there is always somebody to take its place in order to keep order (and hence regulate transactions). In Bakaara, you still have rules of conducting transactions, and militias who control the prime locations in the market, and control over 'taxes'.

[athe]

Absent of the government, there is always somebody to take its place in order to keep order (and hence regulate transactions). In Bakaara, you still have rules of conducting transactions, and militias who control the prime locations in the market, and control over 'taxes'.

Yes, but that it not what you specified. You specified a large market that works without central regulation. Of course there has to be some way to conduct commerce, and in Bakaara market that often involved store owners hiring militias to provide security, but there is no regulation.

Another example might be the cybercrime economy

[Justice]

GM motors will not be allowed to fail because it has so much exposure to CDS that it would bring the whole market down.

Noel will step in and tell us all our this $700tr means nothing and is a zero sum game but somehow i can not see it.

Another example might be the cybercrime economy

yes and eBay themselves are fully paid up members and steer well clear when they try to sell off No-Pal who are wanan be baanksters that fall back on deception since they are not quite up to the task of banking and if anyone has closed a paypal account then be warned they have been know to still withdraw money from members bank accounts after the account has been closed.

Edited April 22, 2009 by Justice

[iserlohn]

Yes, but that it not what you specified. You specified a large market that works without central regulation. Of course there has to be some way to conduct commerce, and in Bakaara market that often involved store owners hiring militias to provide security, but there is no regulation.

Another example might be the cybercrime economy

Of course Bakaara market has central regulation. There are people with guns that collect taxes from stalls. They are normally affiliated with some sort of power structure.

Central regulation does not have to be carried out by governments or states. You just need someone to enforce rules and regulations dealing with the trade at hand.

The cybercrime economy is an economy not a market. Individual forums and IRC channels (which are big enough) might constitute markets, but as you can imagine, they are regulated by the administrators and moderators.

You can only do business with people when there is trust between the parties. This can either be through personal experience or through the trust of a intermediary. However, this model doesn't scale well and in the end market participants have to abide by common rules to ensure that transactions are between trustworthy people. Hence the need for regulations.

[athe]

Of course Bakaara market has central regulation. There are people with guns that collect taxes from stalls. They are normally affiliated with some sort of power structure.

Central regulation does not have to be carried out by governments or states. You just need someone to enforce rules and regulations dealing with the trade at hand.

There are multiple militias with different aims and loyalties who protect different stall holders. Different areas of the market come under different warlords. Some under none. Some stall holders (presumably the armourers protect themselves. This is not central regulation. Stepping from one stall to another the rules may change entirely.

The cybercrime economy is an economy not a market. Individual forums and IRC channels (which are big enough) might constitute markets, but as you can imagine, they are regulated by the administrators and moderators.

You can only do business with people when there is trust between the parties. This can either be through personal experience or through the trust of a intermediary. However, this model doesn't scale well and in the end market participants have to abide by common rules to ensure that transactions are between trustworthy people. Hence the need for regulations.

You are retreating into semantics. You have lost this argument - have the good grace to admit it.

[iserlohn]

There are multiple militias with different aims and loyalties who protect different stall holders. Different areas of the market come under different warlords. Some under none. Some stall holders (presumably the armourers protect themselves. This is not central regulation. Stepping from one stall to another the rules may change entirely.

You are retreating into semantics. You have lost this argument - have the good grace to admit it.

When you are stating that the whole cybercrime economy is a market, then you are the one that is mistaken. Please get some introductory education in economic concepts first. Without basic regulation, markets cannot exist. It is not a question of whether there should be regulation, but what in the market should be regulated, and what should not.

[Joey Buttafueco Jr]

GM motors will not be allowed to fail because it has so much exposure to CDS that it would bring the whole market down.

Do some digging around and report back

[Injin]

When you are stating that the whole cybercrime economy is a market, then you are the one that is mistaken. Please get some introductory education in economic concepts first. Without basic regulation, markets cannot exist. It is not a question of whether there should be regulation, but what in the market should be regulated, and what should not.

A market is any venue where two people meet and trade items or services.

That's all.

There is no need for any regulation whatsoever. Children trade, prisoners of war trade, everyone trades all the time. Throw away your introductory economics textbook - it was written to excuse government predation. Regulation is simply one man threatening another one with violence to get him to comply. This has no place in any free market.

[iserlohn]

A market is any venue where two people meet and trade items or services.

That's all.

There is no need for any regulation whatsoever. Children trade, prisoners of war trade, everyone trades all the time. Throw away your introductory economics textbook - it was written to excuse government predation. Regulation is simply one man threatening another one with violence to get him to comply. This has no place in any free market.

When there is no trust, there is no market, plain and simple.

Trust relationships can be simple, ie. directly between people, or complex, ie. involving intermediaries and third parties. When a market scales (ie. what I said in my original post), a certain amount of regulation is needed in order to maintain trust in the market (through the regulator) as you will not be able to know everybody that you trade with. In some cases, the de-facto regulator is the intermediary handling the transaction (ie. eBay), in a more general sense, the state plays a role in the regulation of all commercial transactions through contract law and statues. That is why order for any large-enough market is needed.

Markets can only be free when all the parties agree to a standard, and when the market gets to a certain size, it needs some people to enforce this standard. These people may or may not be the state, and they may not be one particular entity. There are many markets which are multi-polar regulation-wise, but this fundamental aspect of any large market has to be there in order for it to function at all.

At this stage, we are not even talking about the effectiveness of the market, only the fundamental principals. There is an awful lot of study done into this and even a rudimentary understanding of game theory would be enough to explain the basic principles.

[Injin]

When there is no trust, there is no market, plain and simple.

Yes, there is. All you need to trust is that the thing in front of you is what you want.

Trust relationships can be simple, ie. directly between people, or complex, ie. involving intermediaries and third parties. When a market scales (ie. what I said in my original post), a certain amount of regulation is needed in order to maintain trust in the market (through the regulator) as you will not be able to know everybody that you trade with. In some cases, the de-facto regulator is the intermediary handling the transaction (ie. eBay), in a more general sense, the state plays a role in the regulation of all commercial transactions through contract law and statues. That is why order for any large-enough market is needed.

No, this makes no sense at all. By definition if you have to force someone you don't trust them.

Markets can only be free when all the parties agree to a standard, and when the market gets to a certain size, it needs some people to enforce this standard. These people may or may not be the state, and they may not be one particular entity. There are many markets which are multi-polar regulation-wise, but this fundamental aspect of any large market has to be there in order for it to function at all.

That assumes that the market is actually a colective and that everyone in it are linked. It isn't and they aren't.

At this stage, we are not even talking about the effectiveness of the market, only the fundamental principals. There is an awful lot of study done into this and even a rudimentary understanding of game theory would be enough to explain the basic principles.

Perhaps you should study less and think a bit more?

[Lone_Twin]

When there is no trust, there is no market, plain and simple.

Trust relationships can be simple, ie. directly between people, or complex, ie. involving intermediaries and third parties. When a market scales (ie. what I said in my original post), a certain amount of regulation is needed in order to maintain trust in the market (through the regulator) as you will not be able to know everybody that you trade with. In some cases, the de-facto regulator is the intermediary handling the transaction (ie. eBay), in a more general sense, the state plays a role in the regulation of all commercial transactions through contract law and statues. That is why order for any large-enough market is needed.

Markets can only be free when all the parties agree to a standard, and when the market gets to a certain size, it needs some people to enforce this standard. These people may or may not be the state, and they may not be one particular entity. There are many markets which are multi-polar regulation-wise, but this fundamental aspect of any large market has to be there in order for it to function at all.

At this stage, we are not even talking about the effectiveness of the market, only the fundamental principals. There is an awful lot of study done into this and even a rudimentary understanding of game theory would be enough to explain the basic principles.

But surely the issue of regulatory (coercive) intervention is that it engineers "trust" in markets where there should be none. People trusted that the financial markets were being regulated and that that regulation protected them from catastrophic loss which was clearly not the case.

I have no issue with set rules if all particiapants are in agreement before they enter the market or if they are free to choose from a range of markets offering different rules. The issue is when market activity is monopolised and strictly defined for the benefit of either certain participants or the regulators.

Go try setting up a stock market and see how far you get.

Edited April 24, 2009 by Super Ted

[down the tubes]

Hi, so I'm a newbie on here, been reading for a while and really impressed by the depth of knowledge and understanding on here. But this topic really dissapointed me.

Elsewhere on this site the government is hounded for being complete idiots and not doing enough to curb the excesses of the past boom years, people bemoan the fact that house prices kept skyrocketing way past any sensible levels which bore any relation to ones earnings - a consequence of the 'free market' I would suggest. Governments were interfering in the 'free market' but only to devolve more power to them.

The Blairite's Third Way which sought 'to go beyond those on the right who say "government is the enemy" and those on the left who say "government is the answer".' - a ridiculously simplisistic soundbite - In effect turned out to be conservative policies for the market and socialist policies for public spending. An amazing balancing act not seen since Reagan's 'supply side' economics of the 1980's in which he promised to cut taxes and balance the budget in 3 years. And then left office eight years later after increasing the federal deficit from 900 billion to 13 trilliondollars

The market can survive, as we have just witnessed, with light touch regulation. The market will also boom and bust with light touch regulation. If we want the NHS, free education etc.. then we have to pay for it and a bust with the ensuing massive increase in public borrowing is not the way to do this. It is as unsustainable as 125% mortgages. Regulation (and what regulation is the correct regulation is a completely different argument) is the only way to reign in the bull and provide for consistent sustainable growth. Of course markets will fluctuate with or without government control. Sensible legislation though, will attenuate this.

Yet here I see a passionate argument against interaction and control of the markets and a thatcherite wish to let go the bull.

Yes, it's easy to align oneself with the unconstrained free market view when house prices are in the process of a correction: With prices being so vastly overinflated at the top, then they do have a long way to fall, all the better for those of us at the sidelines.

This is a shallow view though and one which i do try and guard against.

I would not advocate any direct control of the housing market, if only because the implementation of such control would be pretty much impossible. Proper regulation of the financial industry though, would of curtailed the excesses of the past boom and softened any bust period we are in now. It would of allowed prices to remain at least vaguely in the realistic zone with regards to peoples wages.

I worry that I see here a desire for markets to go crazy, for them to vastly overshoot, so they may vastly undershoot. It is not the same as the BTL greed, as I believe most only wish to have an affordable house for themselves. It is greed though. And I'm guilty of secretly wanting it myself but not at the expense of other people's hardship, those who played no part in pumping the market up and now face financial ruin. (Overdramatic I know, there must be some facing it though).

[Lone_Twin]

Hi, so I'm a newbie on here, been reading for a while and really impressed by the depth of knowledge and understanding on here. But this topic really dissapointed me.

Elsewhere on this site the government is hounded for being complete idiots and not doing enough to curb the excesses of the past boom years, people bemoan the fact that house prices kept skyrocketing way past any sensible levels which bore any relation to ones earnings - a consequence of the 'free market' I would suggest. Governments were interfering in the 'free market' but only to devolve more power to them.

The Blairite's Third Way which sought 'to go beyond those on the right who say "government is the enemy" and those on the left who say "government is the answer".' - a ridiculously simplisistic soundbite - In effect turned out to be conservative policies for the market and socialist policies for public spending. An amazing balancing act not seen since Reagan's 'supply side' economics of the 1980's in which he promised to cut taxes and balance the budget in 3 years. And then left office eight years later after increasing the federal deficit from 900 billion to 13 trilliondollars

The market can survive, as we have just witnessed, with light touch regulation. The market will also boom and bust with light touch regulation. If we want the NHS, free education etc.. then we have to pay for it and a bust with the ensuing massive increase in public borrowing is not the way to do this. It is as unsustainable as 125% mortgages. Regulation (and what regulation is the correct regulation is a completely different argument) is the only way to reign in the bull and provide for consistent sustainable growth. Of course markets will fluctuate with or without government control. Sensible legislation though, will attenuate this.

Yet here I see a passionate argument against interaction and control of the markets and a thatcherite wish to let go the bull.

Yes, it's easy to align oneself with the unconstrained free market view when house prices are in the process of a correction: With prices being so vastly overinflated at the top, then they do have a long way to fall, all the better for those of us at the sidelines.

This is a shallow view though and one which i do try and guard against.

I would not advocate any direct control of the housing market, if only because the implementation of such control would be pretty much impossible. Proper regulation of the financial industry though, would of curtailed the excesses of the past boom and softened any bust period we are in now. It would of allowed prices to remain at least vaguely in the realistic zone with regards to peoples wages.

I worry that I see here a desire for markets to go crazy, for them to vastly overshoot, so they may vastly undershoot. It is not the same as the BTL greed, as I believe most only wish to have an affordable house for themselves. It is greed though. And I'm guilty of secretly wanting it myself but not at the expense of other people's hardship, those who played no part in pumping the market up and now face financial ruin. (Overdramatic I know, there must be some facing it though).

OK but where in this picture are you placing:

1) Moral hazard created by regulation and bailout.

2) The impact of intervention in the market by the licencing of the creation of bank credit 1:1 exchangable with cash.

Without the ability to rapidly increase the money supply by banks the rises and falls of the market must be restrained and in the event of the market blow out without intervention mal investment is removed and productive businesses prosper.

Humans will always be subject to "the madness of crowds" but without the state enabling the upside and insuring against the downside the boom bust cycle could not be so large or so destructive.

[down the tubes]

OK but where in this picture are you placing:

1) Moral hazard created by regulation and bailout.

2) The impact of intervention in the market by the licencing of the creation of bank credit 1:1 exchangable with cash.

Without the ability to rapidly increase the money supply by banks the rises and falls of the market must be restrained and in the event of the market blow out without intervention mal investment is removed and productive businesses prosper.

Humans will always be subject to "the madness of crowds" but without the state enabling the upside and insuring against the downside the boom bust cycle could not be so large or so destructive.

Sorry I'm going to have to plead my ignorance on some of this:

1) I'm not quite sure I understand what you mean by 'Moral Hazard'. Are you implying that there is a moral implication to regulating the market? Of course there is. I think that was what I was trying to argue, there will always be those less well off in an economy and it is societies job in the form of government to protect them. I don't want to argue how well or not governments do this, only that in a democracy we place that role with them. How much you control markets to acheive this is again beyond my knowledge. I think most would agree though that 'supply side' or more accurately 'trickle down theory', as Reagan's budget director actually admitted it to be, does not work. Even Reagan and Thatcher realised that a country as a whole has the moral desire to protect those who need it. What they didn't realise was that the discredited notion of 'trickle down' (although the rebranding of this to 'supply side' does raise suspicions that they did know, just didn't care) does not work. The assertion by thatcher that 'As people prospered themselves so they gave great voluntary things' was firmly routed in her longing to return to the unbridled capitalism of the Victorian era. This was a view she was eager to assert herself. Yet most modern citizens would baulk at the prospect of workhouses and the disgraceful labour laws of the victorian age, which is the logical absurdity of following her thinking through. It is this 'moral hazard' which is the most dangerous, that of zero interference in the markets.

2) I'm afraid I don't know about this so can't comment. Always looking to learn though if you want to enlighten me! :-)

I agree with you about the removal of mal investment, it is this aspect of the markets which is fundamental in growth, the removal of bad business ideas and practices. This is the old natural selection argument 'markets red in tooth and claw'. Those who make this analogy though are often apt to ignore the finer subtleties of the evolution theory. Natural selection does not occur in a vacuum, the individuals being selected are not left alone with no interference to compete purely against each other, they are challenged by constrictions and challenges; an island; a river; a desert etc... I won't labour that point though as I dislike this argument, it allows those who don't fully understand the evolutionary theory to use it as an argument to uphold any bad behaviour as just survival of the fittest.

Again I agree with you about enabling the upside and insuring against the downside. Though I would argue that the enabling done in the last boom cycle was more the government taking a step back and reducing their control, yes its enabling but more in a 'turn a blind eye' way rather than holding the hands of industry.

Edited April 24, 2009 by down the tubes

[Extradry Martini]

http://seekingalpha.com/article/131597-der...aiting-to-burst

This all looks like a good, sensible banking system run by honest and honourable men - doesn't it?

Doesn't it?

"Noel, reassurance about financial armageedon caused by derivatives needed on aisle 3!"

What a hugely moronic, stupid piece that is.

I have said for some time that you can sort out the writers who have a clue about derivatives from those who don’t by whether they even merely mention the outstanding amount of derivatives. This guy is clearly in the latter camp.

He starts off by citing the outstanding number of derivatives, and then (correctly) points out that it is meaningless. He then says that the current market value of some derivatives may not be what they are in future (well done!) before, erm, citing the outstanding notional number again…

Well, I guess if you were to ignore the fact that counterparties net all OTC derivatives values in the case of default, the fact that the interest rate swap markets dwarf the CDS market in size, the fact that the risk to any bank is in concentrations of counterparty credit risk in one direction on CDS in a single name, the fact that premiums for pretty much everything have gone through the roof already and we haven’t had a systemic risk arising from CDS (except possibly AIG - but we have no idea whether the specific systemic risk there was from CDS or more mainstream insurance) and the fact that banks have always calculated counterparty credit risk on a contigent basis, not a mark-to-market basis; then you might think his piece was ok. But that is an awful lot of ignoring to do and you’d have to be pretty ignorant to do it...

Still, it doesn’t mean it can’t happen – it is just far, far less likely than the guy suggests and will not happen for the same reasons. What makes me laugh every time I see this stupid analysis (i.e. one based wholly or in part on the outstanding notionals of CDS) is that the one single reason why they are capable of being so destructive has been missed in every single one of these moronic articles and forum posts. It is so simple yet I have never once seen it in this forum or linked to in this forum. I guess the fact that it doesn’t involve being able to quote very big numbers is the real reason why no one points it out….

[iserlohn]

But surely the issue of regulatory (coercive) intervention is that it engineers "trust" in markets where there should be none. People trusted that the financial markets were being regulated and that that regulation protected them from catastrophic loss which was clearly not the case.

I have no issue with set rules if all particiapants are in agreement before they enter the market or if they are free to choose from a range of markets offering different rules. The issue is when market activity is monopolised and strictly defined for the benefit of either certain participants or the regulators.

Go try setting up a stock market and see how far you get.

I'm not arguing for more regulation, I was just emphasizing that basic regulation is necessary when a market scales. This isn't the market intervention or product regulation you are talking about, it's the market framework and the basic rules of trading.

Some people disagreed with this, for what reason I do not know. The reactive wing of HPC seems to be in full force constantly.

In any case, addressing what you said, your point that specific regulations on markets can inhibit choice. Your argument that the heavily regulated securities markets are in fact monopolies may not be entirely correct, but it does have some monopolistic elements. However, one has to look at the intent of the regulation and what it is trying to achieve. With securities, you are buying an abstract share of a legal person, itself a creation of law, so statutory regulation of such activites do not seem that far fetched, does it? If people were able to sell and buy this freely without any common standard, there would certainly be problems with 'mistake' (I'm using the legal definition here) and fraud. There is a reason why contract law and other law regarding trade exists, and not all of it is because the government wants its nose in every pie. The world is full of grey and not every government action is tyrannical.

The problem with the current securities regulation is not that there is regulation, but that the regulators are not independent. They are influenced heavily by major participants in the market and hence create regulation that does not work, and almost always compounds the problem. In an ideal world, securities regulation should be straightforward, and that people wishing to set up such markets should be able to do so at reasonable costs, as long as certain standards are met. This is easy to say, but hard in practice, because some of these things get very technical legally. That is why there should be reforms and independence on regulator independence.

In any case, your point about regulations engineering false trust is valid. The ratings system for example is the one of the big scams in financial regulation. Gauging risk has always been more of an art, even for actuaries determining individual risk in populations. In financial systems, it's more like weather prediction. The fact that there has been so much trust placed on something so flimsy is a testament to bad regulation. So it must be changed. In this case, there should be fundamental changes on how instruments are packaged and sold to focus on transparency, not by hiding everything behind a ratings label.

However, arguing that all regulation is negative and detrimental is counter-productive. That was the point I was trying to make, hence shouted down by all the free-market zealots that roam on here all day.

[Injin]

I'm not arguing for more regulation, I was just emphasizing that basic regulation is necessary when a market scales. This isn't the market intervention or product regulation you are talking about, it's the market framework and the basic rules of trading.

Some people disagreed with this, for what reason I do not know. The reactive wing of HPC seems to be in full force constantly.

In any case, addressing what you said, your point that specific regulations on markets can inhibit choice. Your argument that the heavily regulated securities markets are in fact monopolies may not be entirely correct, but it does have some monopolistic elements. However, one has to look at the intent of the regulation and what it is trying to achieve. With securities, you are buying an abstract share of a legal person, itself a creation of law, so statutory regulation of such activites do not seem that far fetched, does it? If people were able to sell and buy this freely without any common standard, there would certainly be problems with 'mistake' (I'm using the legal definition here) and fraud. There is a reason why contract law and other law regarding trade exists, and not all of it is because the government wants its nose in every pie. The world is full of grey and not every government action is tyrannical.

The problem with the current securities regulation is not that there is regulation, but that the regulators are not independent. They are influenced heavily by major participants in the market and hence create regulation that does not work, and almost always compounds the problem. In an ideal world, securities regulation should be straightforward, and that people wishing to set up such markets should be able to do so at reasonable costs, as long as certain standards are met. This is easy to say, but hard in practice, because some of these things get very technical legally. That is why there should be reforms and independence on regulator independence.

In any case, your point about regulations engineering false trust is valid. The ratings system for example is the one of the big scams in financial regulation. Gauging risk has always been more of an art, even for actuaries determining individual risk in populations. In financial systems, it's more like weather prediction. The fact that there has been so much trust placed on something so flimsy is a testament to bad regulation. So it must be changed. In this case, there should be fundamental changes on how instruments are packaged and sold to focus on transparency, not by hiding everything behind a ratings label.

However, arguing that all regulation is negative and detrimental is counter-productive. That was the point I was trying to make, hence shouted down by all the free-market zealots that roam on here all day.

Here you are using the word "regulation" to mean "agree ground rules between people trading."

I have no problem with setting ground rules, but regualtion actually means "tell people what to do and if they don't obey, arrest them."

Edited April 24, 2009 by Injin

[iserlohn]

Here you are using the word "regulation" to mean "agree ground rules between people trading."

I have no problem with setting ground rules, but regualtion actually means "tell people what to do and if they don't obey, arrest them."

Regulation means what it says it means. Even the Austrian school admits that a basic amount of coercion is needed to ensure that contracts are enforced.

When you accept that market regulation is not binary and is more of a continuum, you will understand that the concept of a "free market" is only relative. What is the minimal amount of regulation that a market can run properly with?

In the past 20 years, we have been so pre-occupied with de-regulation that a lot of regulation was scrapped because of the idealogical climate at the time without first critically analysing what the effects that would have. When things go wrong, the fundamentalists blame the lack of ideological purity in the market (regulation of money supply and credit for example). That is absurd.

[spivT]

What makes me laugh every time I see this stupid analysis (i.e. one based wholly or in part on the outstanding notionals of CDS) is that the one single reason why they are capable of being so destructive has been missed in every single one of these moronic articles and forum posts. It is so simple yet I have never once seen it in this forum or linked to in this forum. I guess the fact that it doesn’t involve being able to quote very big numbers is the real reason why no one points it out….

Hi EDM,

i'd be interested to know the answer to the question of the real reason why they can be so destructive...and not the fatuous statements about notional values... And under what circumstances can lead to such a situation where they can be destructive ?