My understanding has always been that there are many types of derivatives some have inherent value and some do not. I have seen options used to backstop losses as a form of insurance which makes sense...there is a value on what has already been purchased and it is backstopped by a sell at a given price to someone who is willing to pay it if that price is met. Other forms of derivatives do not have such inherent value and are pure gambling on movement.
I worry they’ll throw the baby out with the bathwater just like any other time organizations and governments get involved.
If we just allowed failures to fail and got on with the vulture cleanup of the mess things would resolve themselves much more quickly. This whole thing about trying to find blame in speculation where there is none has to stop.
One of the points in the documentary, which I just watched this morning, is that a derivative isn’t insurance in the normal sense. With insurance, you can only insure against that which you own. With derivatives you can insure what someone else owns, and thus many people can be insuring the same thing. When your house burns down, the insurer is on the hook for the price of one house. When a derivative blows up, there can be a large number of copies out there, all of which must be redeemed.
There is something intrinsically unethical about betting your neighbor’s house will burn down, but that is essentially at the core of the problem with credit-default swaps, etc.
The documentary had a number of persuasive points, but they lost me when they sympathetically portrayed (in the form of subject-matter experts) the following people in interviews: George Soros, Dominique Strauss-Kahn, and Barney Frank, with Matt Damon as the narrator.