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The Derivative Bomb?

I’ve followed the derivatives issue for some time, and have a very tough time feeling that the derivatives themselves were to blame for anything. Puts and calls on traded stocks and commodities are priced by supply and demand, but the Black–Scholes model offers a convenient equation to calculate a ‘fair’ price. On the other hand, when the rating of a product is severely flawed, any derivatives based on that product will be flawed as well.

Joe

  • DIY Investor May 14, 2010, 1:14 pm

    You’re right…derivatives didn’t cause the blowup. Derivatives have been around since the late 1970s in the form they are today. Mortgage backed securities have been around longer and fueled the enormous housing boom of the the last 40years.
    The culprits are Greenspan and Bernanke. They pushed interest rates down to 1%. If they had stopped at 3% in 2003 then housing prices wouldn’t have skyrocketed, ARM and subprime issuance wouldn’t have gone through the roof.
    It is just more convenient and simple to blame “derivatives” a word most of the media hadn’t heard of 3 years ago!
    Ask most people the difference between the U.S. Treasury and the Federal Reserve and they have no clue. It actually requires learning something and this takes some effort. Better to take the easy way out and just repeat what you hear.

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