by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I just watched parts 3 and 4 of the 4 part PBS Frontline documentary “Money, Power and Wall Street”, http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/ I cannot really comment fully on it as I have not yet watched the first two parts. There is however one thing that caught my attention – as in all of these documentaries – and that is that derivatives are thoughtlessly and automatically given the blame. Having spent a good chunk of my working life in derivatives, I obviously have a bit of a biased view. However, just once I would like to see derivatives explained in context.
Derivatives, like fire, telecommunications, automobiles, oil, the wheel, pharmaceuticals, and virtually every other manmade invention and technological advance has positives and negatives that can be (and should be) associated with them. Derivatives are not all bad. Bankers are not all evil. Financial engineers are not greedier than electrical engineers (perhaps financial engineers are more competitive, but that is not the same as greedy).
Derivatives did not build sewers to no-wheres, derivatives did not write laws that essentially said that banks had to grant mortgages to ninjas, derivatives did not create 60 years of unearned entitlement in Greece (as well as many other places), derivatives did not create credit cards and the consumer society. Yes – derivatives did help to facilitate a lot of these activities, but derivatives were not the cause, nor the force behind going to extremes on many of these issues.
The next time I cut my finger, say something stupid, fall down some stairs, or bring on some negative activity that is caused by my inattention, lack of focus, lack of integrity, or inappropriate behavior, then I am simply going to scream out in anger that “Derivatives did it!” and wait for regulation to fix it. That seems to be the orthodoxy.
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