Encouraging Deadly Financial Viruses

Randall Wray highlights two great insights that arose at the annual Minsky conference last week in NYC.

First Joseph Stiglitz (Wray’s words, emphasis mine):

Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus. And, indeed, just as Stiglitz said, spreading those deadly weapons all over the world ensured that when problems hit, the whole world financial system was infected.

Next, Frank Partnoy:

He said that these innovations mostly exploit information asymmetries in order to:

a) dupe customers (think Goldman Sachs and John Paulson constructing synthetic CDOs sure to blow up, and betting against Goldman’s customers who bought them); and

b) engage in regulatory arbitrage (evade rules, laws, supervisors, etc; ie, move trash into SIVs to evade capital requirements).

But the financial industry and its Republican toadies would have you believe that regulating our outlawing these derivatives will destroy American “innovation.” Yeah: and we should also encourage innovation in suicide-vest technology.

21st Annual Hyman P. Minsky Conference: Debt, Deficits, and Financial Instability « Multiplier Effect.

Cross-posted at Angry Bear.