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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (834)	3/25/1999 11:31:00 AM
From: Henry Volquardsen	Read Replies (3) \| Respond to of 2794

Clark, with all due respect I disagree. Mr Greenspan's analysis is correct. I don't know who David Tice is but he is wrong. Derivatives make an easy bogeyman but the reality of the collapse in the emerging market currencies was their deteriorating fundamentals and short sighted economic policies. Did derivatives accelerate the process in some countries? Perhaps. But the deteriorating fundamentals made it inevitable. Afterall we have had numerous identical collapses in emerging markets in the past when there was no derivative involvement. No amount of derivatives can collapse a currency if the fundamentals do not justify it. If they could the Argentinian currency board would have been broken. It wasn't. The politicians in the emerging markets have been trying to blame the derivatives for the destruction. Nonsense. They are just shifting blame. If they had responded to the Japanese economic slowdown with appropriate flexible policies they would have survived. The derivatives market in fact worked exactly as Mr Greenspan said. Risk was layed off to speculative accounts who wanted to take the risk. The biggest losses occured in hedge funds. Nothing in what Mr Greenspan said indicated no one would ever lose money. He said the risk would move to those who wanted it. It did. Mr Tice makes the assertion that the presence of derivatives caused the excess investment in the emerging markets. Importantly, many "hot money" speculators and institutional investors that came to the region were under the assumption that it would be possible to use derivatives to protect against loss; to use them as insurance. The belief was that when storm clouds approached, they would simply call their favorite Wall Street derivatives trader and buy puts to protect against loss. Importantly, this assumption of the easy and inexpensive availability of insurance changed behavior; investors took more risk then they would have, had derivatives not existed. Nonsense. Any student of economic history will recognize that over investment in dangerous markets has been a very common event. Just look at the history of emerging market lending for the last several centuries. Investors always get complacent after long periods of good times. And they invariably over commit. They did this before derivatives just as they did it now.