Buffet and Cuban apparently came out recently giving their usual spiel against derivatives like CDSs and ETFs. And of course, Cramer followed it up with a big speech on how this justifies his prejudices against the products and the people who make them.
I know lots of you hate derivatives, because you blame the 2008 housing bubble on derivatives held in the banking industry.
There’s something to be said for what these products allow; traditionally, you could either invest in a company or avoid it. Short selling allowed for limited bets against certain sorts of behavior, but generally speaking, it’s risky and there are limits to what it can accomplish.
CDS’s, however, can permit someone to really bet directly against anything; from governments to organizations. Anywhere a promise has been made, the insurance of that promise can create profit potential for the avid disbeliever.
Because of that point, now we have charges being leveled by the old establishment that this is “anti-social” or “morally corrupt” and that the practice should be disbarred.
Before you jump on the anti-derivative bandwagon, I just want to state an opinion. It is something that, as a capitalist, I firmly believe with all my heart and soul.
Good decisions deserve to be rewarded, and bad decisions should not be.
How many times, throughout my life, have I heard you people bitch about governments? About their waste and their incompetence; how many times have you complained that they don’t deserve to spend “your money.”
Now, for what is perhaps the first time in history, not only can the bad choices of heads of state be called out almost immediately, but also the judicious individuals with the spine to call out the lies and false promises can be rewarded and entrusted with further resources and the accompanying power and authority over them. And after years of considering yourself one of those individuals with the courage to call it like it is, now when it matters most you choose to bat against the people who have always been on your side.
Do you want to know how it is that things never change?
Has it ever occurred to you that if Italy’s yields had not blown out when they did, people would still be piling into Italian debt, and Silvio Berlusconi would still be at the helm? Does it strike you as ironic that this “reckless behavior” of betting directly against European governments, this “anti-social” crusade, has directly stemmed the flow of money from the private sector into the empty guarantees of these snake-oil salesmen?
For how many more years would the European countries have been able to limp along, gobbling up precious investment, if the CDS market hadn’t said “enough?”
But no, because the act of forcing Europe’s hand had the unpleasant side effect of forcing people to question their financial wellbeing, now you’re up in arms against the men and women whose only crime was to point out the obvious.
Now you side with Warren Buffet, one of the most politically active members of the establishment around, because he has some cute phrases and looks like your grandfather?
Do you know why Buffet really hates derivatives? Because they change the game.
You need to get some courage and decide what you believe. If you truly believe that the elected officials of the world are unworthy, unintelligent, and deserving of removal, then you need to grow a pair and accept that this is a way of getting rid of them. And yes, it will be accompanied by some pain.
Or you can side with the EU career politicians who are fighting for their lives and with all their desperation to hold onto the keys of the kingdom, even though there are others who are more deserving. You can help fight their battle for them, and let them stay in a position to spend valuable resources on all sorts of nonsense; let them keep giving themselves and their friends kickbacks galore and indulge in their wildest fantasies. And yes, this route lets you put your head back in the sand.
But don’t pretend like you actually care about political corruption and having competent governance, and then with the same breath strike down one of the most powerful tools for facilitating that transition. It sounds stupid.
The market is most definitely not perfect; and these instruments are facilitating all sort of new, questionable choices to be made. However, if it’s between having bad choices with more freedom, or bad choices with less freedom, you might as well go with option number one.
At least with the first one, those who try and take advantage of the system can be punished for it, and those who have value to add can find their reward.
Any instrument that has the power to help force out the incompetent prime ministers of two countries in the same week has my support.