Wednesday, June 5, 2013

Demand for Risk?

In the Wall Street Journal this morning, in a story titled “One of Wall Street’s Riskiest Bets Returns,” we read the following: “Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.”

To recap the meaning of this term. Collateralized Debt Obligations are produced by pooling bonds of all kinds, arranging them into slices from safest to most risky, and then selling each slice. The riskiest slices have the highest returns. “Synthetic” CDOs pool insurance policies written on the bonds, also arranged into slices. Again, the least safe have the highest payouts. The larger the total amount of such pools, the greater the risk of a general melt-down.

It is entirely reasonable to think that our public life—that our governance—is altogether out of control. The financial melt-down began in 2006. These kinds of speculative derivatives were the principal cause of it. Now they are back? Let us not forget that creating ever greater “attractive” pools led to criminally negligent lending—guaranteeing a melt-down, sooner or later. Are the dynamics any different today?

Our national public sector, however, appears to be paralyzed. We should have had simple laws, already in 2008 or earlier, absolutely prohibiting the creation and trading of any kind of derivatives. That didn’t happen. You want to buy stock? Fine. You want to buy a bond? Fine. All other so-called creative “investment products” should be outlawed. Didn’t happen. Therefore, of course, even stocks and bonds are riskier to own. Gambling is carefully controlled all over these many states. Why is gambling on the markets getting a free ride?

Every jewelry store we pass has signs out saying: “We buy gold.” Well, the right answer to that is to hold on to gold. What with the “parents” now insane, it is almost predictable that in due time paper currency will go the way of all other intangible “instruments.” And people biting on coins will also return. It’s reasonable, in other words, to act as if the world has gone plain crazy.

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