Absolutism drives me crazy, which means that I cringe over nonsensical phrases like "strict constitutionalism" - a document that enshrined slavery - and "religious fundamentalism." Authoritative needs to be questioned because situations change, people make mistakes and sometimes the text simply gets it wrong. Hence, I can love The New York Times as the greatest newspaper in America and still feel the need to take it task in the strongest possible terms from time to time. Today is such a day.
In an article called, "Administration Seeks to Regulate Derivatives," the New York Times made a number of statements that could have the effect of lulling people in a false sense of security with respect to derivatives reform. I draw your attention, for example, to the innocuous sounding statement: "Used properly, they [derivatives] can reduce or transfer risk, limit damage from market uncertainty and make global trade easier." Pardon me for asking the obvious but how the hell can anyone have the audacity to make this claim in light of the past year?
All that we can we say with any degree of certainty is that derivates are intended to produce these salutatory outcomes, but anything that's both relatively new and has produced a bona fide global, financial crisis is undeserving of such facile treatment. It's true that the paragraph goes on introduce the idea that derivates can be "used poorly," but it ignores the simple fact that we no one - including Lawrence Summers who supported the Commodity Future Modernization Act under the Clinton Administration - really knows what "used properly" means. (It goes without saying that the vast body of Congressional representatives lacks anything like a trustworthy knowledge of the concept.)
My contention is not that derivatives should be abolished: it's that we should not 'normalize' the concept or treat the derivatives market as somehow safe. Instead, let's think of derivatives like plutonium and the financial system as a nuclear power plant. By all means, use the fuel but never, ever forget its awe-inspiring capacity to wreak destruction. One way to do this is to ensure that the financial instruments with national security implications should be traded in a highly transparent and, dare I say, well regulated environment. Another way is to for the financial press to maintain a high degree of healthy skepticism and resist the temptation to normalize an instrument and market which so recently rained destruction down upon us all.
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