[OPE] James Carville stumped by derivatives...

James Carville, the wry FT commentator, confesses:

"As someone who has prided himself on being able to reduce complex problems to simple messages, I am totally stumped by derivatives. After hours of research, they seem to be something rich, greedy bankers thought up to make more money selling them to other rich, greedy bankers. They did not understand what they were selling. Buyers did not understand what they were buying and insurers did not understand what they were insuring. Now the taxpayer is stuck with these things that no one can explain. It is notable that the single most eloquent quote of the crisis by a flummoxed Mr Bush came in the first bail-out debate when he said: "If money isn't loosened up, this sucker could go down." The problem is compounded by the fact that the only people who can explain them are the bankers who created them. It is like relying on a criminal to tell us how he committed a crime - and paying him to do it. To be fair, I thought Mr Obama did a good job on Jay Leno explaining the AIG situation until he used the word "leverage" (translation for laymen: financial shovel that people use to dig themselves into a deeper hole), a term that escapes 97 per cent of the public. It is not that Mr Obama is not communicating as well; it is that what he is communicating is too complex to reduce to simple words, especially when in the last 40 years, the length of a TV soundbite has dropped by 40 seconds. That being said, try this experiment. Contact an engineer and ask him what a bridge is. Or contact a doctor and ask what surgery is. Then walk into your local bank and ask your friendly banker what a derivative is." http://www.ft.com/cms/s/0/7f21ae14-198a-11de-9d34-0000779fd2ac.html

But surely it is not so difficult to understand what derivatives are? As I said before, it's simply an insurance policy used by rich people and institutional investors to safeguard their wealth and income, based on the principle of "hedging your bets", and using mathematical models to estimate probable economic and financial trends. But like any money-making venture, the insurance policy tends to become a (tradeable) end in itself, it begins to affect the very economic process it seeks to anticipate, and this had the end result that more insecurity is created for the world's population than there was before. The security of property transforms into the insecurity of property, and that challenges the very basis of bourgeois society.

Ideologically, it means that people become more skeptical about the mathematization of economics. After all, even the most sophisticated mathematical models were unable to prevent the destruction of 50 trillion dollars of asset values across one and a half year ("On a global basis, $50 trillion dollars in global wealth has been erased over the last 18 months. This includes $7 trillion dollars in US stock market wealth which has vanished, and $6 trillion dollars in housing wealth that has been destroyed." - Lawrence Summers, 13 March 2009).

Bourgeois "science" said that theoretical physics and mathematical statistics had finally cracked the secrets of human nature, and claimed the "end of history". However, the "science" has now produced enormous losses, losses equal to the value of everything the world produces in a whole year. This creates a massive intellectual problem for bourgeois ideology, although Marxists haven't grasped it yet.

Jurriaan

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Received on Sun Mar 29 10:47:31 2009