An article by Bruce Johnson at the American Thinker, “Are All Securities Created Equal?, questions whether the bundling of securities and derivatives is really “capitalism”. His contention is that bundled derivative products are too many steps removed from where wealth creation takes place and critics should not blame “capitalism” for what happens.
I responsed with the following comment:
An honest market where derivatives are sold is good for capitalism, because it creates a bridge between those who have capital (savers and investors) and those who need it (businesses). Stocks are derivatives: they are certificates of paper that represents parts of companies. I sell stock options. These are derivatives of stocks whose trade is based on an underlying stock position. Options provide an opportunity for market participants to reduce their risk–by selling positions, I take on the risk of others at a premium.
The problem with the mortgage CDOs is that they were packaged liar-loans that the lenders who made them knew the borrowers could never pay back, and so they bundled them and sold them in order to avoid their own bankruptcy. This is a sign of systemic corruption in the US mortgage industry: banks, brokers, borrowers, and bureaucracies are all corrupt.
The current United States form of capitalism is on its last legs, as the Federal Reserve kicks the can down the road of the greatest derivative fraud of all time: the US dollar. It used to be a derivative of gold, then it became a derivative of the “full faith and credit of the United States”. Since that isn’t worth bucket of warm spit anymore, the dollar itself is a fraud.
I have a saying every time one of my many purchases from China stops working: The Chinese pretend to give us products that work, and we pretend to give them money that’s worth something.