I agree with Buffet that "derivatives are dangerous". I understand the value of futures. Kelloggs can lock in the future price of corn so they can reliably price their corn flakes, but options on futures start to get pretty removed from any grounding in a real commodity. But then, swaps on options on futures on corn get even crazier. But at least we are talking about corn. When we the swaps are on options on futures for market indexes we are really out there. These trading instruments are radically derived from an original commodity.
Then the fatal economy-disaster-trigger-device. swaps and (other derivatives) on bundles of bad housing debt. and the economy went thumbing down. Chris _____ From: [email protected] [mailto:[email protected]] On Behalf Of Dr. Ernie Prabhakar Sent: Monday, March 02, 2009 7:25 AM To: Radical Centrist Discussions Subject: [RC] Warren Buffet's take on the economy Whatever you think of Buffet's politics, his insider analysis of our current credit crisis is mandatory reading for anyone who wants an informed opinion: http://www.berkshirehathaway.com/letters/2008ltr.pdf DRB, you'll be pleased to know that he is blunt about the risks of the government bailout, and how it is skewing the economy. And has some ungentle words for FM: Putting people into homes, though a desirable goal, shouldn't be our country's primary objective. Keeping them in their homes should be the ambition. Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the books. I hope Obama listens to him. For all his progressivism, Buffet is a hard-nosed businessperson who understands the value of money and the nature of risk, something few academics do. -- Ernie P.
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