Reply #2: Just how bad is the world's derivative habit? - by Paul Tustain [View All]

[ozymandius]

This article includes the official figures which show the mind-boggling extent of the commercial world's derivative habit. They illustrate why Warren Buffett calls derivatives 'Financial Weapons of Mass Destruction'.

'Credit' has an almost religious quality for consumers, which parallels its genuinely religious relatives 'credo' and ‘creed’ – both from the same linguistic root. Yet like cocaine it comes in lines and is a powerfully habit-forming stimulant; a much less attractive imagery.

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Nowadays access to credit is a human right. It is available to consumers through personal loans at the bank, credit cards by direct mail, and store-cards at the till. Its mail-based advertising single-handedly sustains the postal service. So important is it that the British government even intends creating a publicly owned state bank to grant it to those unfortunates unfairly excluded by the prejudice of a private banking sector which reckons these prospective customers most unlikely ever to have the means to pay anything back. (Wise of the banks; unusually dim even for a government.)

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Here - under the disguise of clever financial management - they underwrite financial contracts for fantastic amounts of money and generate small profits on large but improbable risks. These derivatives are just like insurance, only the risk that is being insured is not a fire, or a flood, but the equally low risk financial equivalent - something like "the yield on 10 year US Treasury bonds, less the yield on 5 year Japanese government bonds, divided by the yen/dollar exchange rate will not exceed 5% before the end of 2004." They are always confusing and in the end rather unlikely to go wrong.

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