Hi, Frank -
Returning to your question...
"My view of the financial instrumentalists' modalities, when juxtaposed with those of conservationists, isn't as much a cynical observation on my part as it is a statement that the two groups are not aligned with one another in their core areas of concern, other than each of them desiring to come out whole. For example, by leveraging correctly - even in an entirely scrupulous manner, while adhering to the most widely accepted regulations and standards - it occurs to me that it's entirely conceivable that one side stands to make fortunes at the expense of the other side's catastrophies.
Are sufficient regs from the SEC and the Commodities sector in place to ensure that this doesn't happen under circumstances tht are less than scrupulous? Is this even a goal worthy of chasing? Can such an end even be achieved, given the layers of complexity that are involved in derivative- and hedge fund- trading activities?"
A - There are many ways to mitigate financial risk. The simplest and cheapest is the contingency fund - "rainy day" savings to be applied when needed. Forward selling is another way. Depending on individual circumstances like cash flow, these may be impractical. The question of executive bonuses is dealt with below.
B - Proper, financially-controlled hedging by the user - a municipality, a company, a utility, etc., exposes them to a risk of illiquidity, which equals the naked cost of the hedged event plus lost transaction costs.
C - The cumulative effect of hedging, with the assumption that the house always wins over time - increases cost to the end-user. So does insurance. The end-user always pays.
D - As previously stated, one could make the argument that efficient hedging tends to forestall proper reaction to climatic events and changes - by "evening out" or blunting financial impacts. The point is that ART may partially disguise the immediacy and extent of the problem. Ditto capacity and infrastructure issues. Through hedging, a company may, for a time, stabilize prices to consumers, when in fact costs have become higher, permanently.
E - "Hedging gone wrong" - without proper financial controls, and hedging as a macro speculative practice - leveraging and gearing - is a real danger. Not only in the way you characterize it above, but in a more general sense.
usagold.com
F - There are no guarantees. In the overview, I agree with the view that derivatives have actually increased macro risk to the world economy. No one's driving the bus, there are no international controls, and there are a lot of cowboys out there. One could even take the view that a party with access to sufficient resources could adversely affect global finances with intentional misuse of derivatives - i.e., economic warfare.
However, use of specific hedges for specific purposes with proper financial controls is another matter, and potential losses are constrained as above.
The statement was that hedging exists, and is being widely used. There are obvious ethical and situational concerns, which are openly acknowledged.
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More than you ever wanted to know about accounting, hedging, derivatives -
trinity.edu
....what really happened at Fannie Mae, and "bookouts" at the Bonneville dam... issues with hedging
trinity.edu
Issues in calculating precipitation probability
64.125.144.31
64.125.144.31
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Trying not to get too far from the original point, the springboard was nuclear power generation on the Daniels model, as proposed by the Chinese. It was suggested for the following reasons:
A - Affordability
B - Relative safety
C - Dependability, and relative freedom from variables such as headwater, wind, temperature - climate - and fossil fuel costs
D - Modularity
E - Scalability
F - Concurrent favourable effects on future capital requirements, present US trade deficit problems, and some existing geopolitical issues
Perhaps the best way to close is with the following link, which tends to substantiate the statement that those whose business it is to evaluate risk - insurers - have an eye-opening view of the future. The combination of population growth, climatic change, and variables in fossil fuel use, together with other interdependent drivers, is dealt with in this study.
It's long. While the area discussed is the UK, the same problems are global, to different degrees. It should dispel notions that statements made here are "alarmist".
cru.uea.ac.uk
Apologies for the long posts.
Happy New Year Frank, to you and your readers.
Jim |
