Why We Need Derivatives Regulation

[mRx 16]

scandal,

As one of the laissez faire free market guys amongst us, I absolutely don't contest anything you wrote regarding the process of production.

Money, for the purposes we're discussing, is merely a medium a exchange. A sells product A for money in order to buy products D, G, R, P, and Z. A must have first acquired, through labor, product A, in order for him to exchange it for money.

Without the use of such an accepted medium (money), A would be forced to trade with other sellers directly. Many problems arise though, as the sellers of the product he desires may not want product A. Therefore money eliminates these problems. I know this is all elementary, but it will prove useful further down.

I'm sure that you won't contest the fact that in order for production to occur, it must be funded. You illustrated some of the many ways (commercial paper and loans) that funding occurs; however, it still must be paid for. This means that somewhere in the economy, savings must be accumulated in order for any loan to be performed. If A desires a loan of $100, and enters a contractual agreement to borrow $100 dollars from B, with the agreement that, say, $110 dollars will be repaid at a determined date, then we can deduce that B must have $100 dollars in deferred consumption (savings) in order to be lent to A. (Of course in our complex economy it's never that simple. B may have needed to borrow the funds from C who in turn borrowed from D, and so on.) But the fact remains. In order for $100 dollars to be lent, $100 dollars must be saved. Therefore, somewhere in the economy, a stock pile of goods/services must exist that is equal to $100 dollars, otherwise no loan could possibly be made.

Up to this point, nothing I've wrote should be contested.

Herein lies the problem, though. With the existence of the Federal Reserve and fractional reserve banking, money is created out of thin air, nonrepresentative of actual savings (or accumulated wealth).

This creates a massive imbalance. It's as if the lender B who lent $100 dollars to debtor A didn't actually have $100 dollars (goods/services equal to $100). At some point, it will be realized that there are insufficient saved resources (goods/services) to compensate the $100.

That's the fundamental problem with our economy, and the reason we are in such bad shape. It's not lack of regulation, greed, recklessness (albeit these are symptoms), but the problem is with the system itself.

When people believe they have more money than they actually do, they will make financial decisions that they normally would not have.

What's the result: all the problems you've mentioned in your last post. Bad decisions were made, and corrections must be made.

No amount of new regulation (on top of the 10's of thousands of existing SEC regs) can change the fact that when money>savings, imbalances occur, and recessions (corrections) ensue.

That's all I'm saying...