> I'm a bit short of time now, but I do want to say something. I met Dick at
> the Socialist Register mini-conference in Toronto the other week and found
> him an interesting guy. For some reason, he thought I took some sort of
> vulgar populist line and thought derivatives in particular and finance in
> general were all a fraud and a waste. Of course I don't. But there's a lot
> of frothy parasitical waste around a meaningful core. So with derivatives,
> yes, they are an attempt to cope with uncertainty and volatility. But, there
> are several buts. One is that derivatives are used very selectively - firms
> exposed to price risk on currencies and commodities don't always hedge,
> because they're making market judgments, meaning essentially that they're
> speculating. And the banks the create OTC derivatives bury a lot of opaque
> crap in them - e.g., the mortgage CDOs that blew up not all that long ago.
> Players who think they're hedging or doing something else conservative can
> end up getting hosed. And many derivatives have no rationale other than to
> evade taxes or regulations. So it's a long way from an either/or thing.
Yeah I agree it's not either/or. I think they have emphasised the functional side because so many others on the left see nothing but speculation, greed, waste etc. (I would never have pegged you as one of those at all.)
As for firms choosing not to hedge - the point is, though, that when a market for the hedge exists, it puts a price on the risk, so even the risk assumed by omitting to hedge has a value calculated through market processes. That's one thing they're saying that make derivatives interesting - that valuing of all kinds of risk (and, I would add, the finer valuation of liquidity by instruments of securitisation etc.) That doesn't have to mean the market values risks accurately in an actuarial sense, or even that real world risk can be reduced to quantifiable probability.
As I understand it, it is kind of analogous to the reduction of heterogeneous labour to abstract labour by the market - there's nothing inherent in all these different kinds of work that makes them commensurable, except that they are valued on the market, ultimately through processes of competition in which production time is critical. And it's a two-way process: it's not only that capital takes labour and labour processes as it finds it on the market, and 'abstracts' it by valuing it, but that the fact of valuation on the market and competition shapes labour processes, rationalising them, making them more efficient.
So the argument is that the parcelling up of risk allows for commensurability and hence rationalisation in a finer grain than when the firm was the ultimate parcel. And all kinds of risks can theoretically now be valued (though in practice the markets may be lacking) - e.g., changes of government, climate, strike waves, currency adjustments.
Mike Beggs