Re: R' black scenario and derivatives

A comment on your point 9 below. While of course derivative trading is a
zero sum game as you describe, nevertheless, the borrowing (leveraging)
done to invest in derivatives does create a potential danger if the losing
better can only begin to pay off the debt incurred (and still not be able
to pay off all the debt) by liquidating huge assets, causing the price to
fall, which lowers the value of assets held by the lenders (creditors).
That is why the Fed felt it was a good idea to bail out Long Term Capital.
They feared a collapse of the whole international financial system because
so much had been borrowed and leveraged.

Also, based on your comment, I would assume that all gambling, including
stock and bond trading, is a zero sum game? Would you agree? For every
purchase (buyer), there is a sale (seller). For everyone losing money,
someone is making it or has made it (by selling before the crash for
example).  But, as Marx pointed out, crisis comes from the separation of
purchase and sale.  Some buyers can restrain from buying, therefore sellers
cannot sell; value of the asset declines.  Those wanting to sell lose money
by having to sell below value, while institutional holders of the asset
(financial institutions) that has lost value now must reduce their bottom
line causing a financial crisis (reduction in liquidity) that can cause an
economic crisis (not enough money or credit around -- at affordable price
-- to conduct or increase business.)  

BTW, I was struck by the vituperation in your response to R's black
scenario. I would not want to make comments on this list if I thought my
comments/analyses would elicit that kind of hostile attack over and above
reasoned critique. I appreciated your reasoned critique but was put off by
the vitriol.

As I am not an economist, I would appreciate responses by economists to my
reasoning.  

Roz

At 06:21 AM 11/3/99 EST, EAST4WIND@aol.com wrote:
>
>9. As an economist, he ought to resign (oops, I forgot he's already a 
>former 
>working economist) for trying to put one over on his readers about how 
>derivatives spur higher risk taking through leverage.  Uh-uh.  Wrong.  
>Can't 
>happen.  All derivatives, are, by definition, part of a zero-sum game.  
>For 
>every risk taken by one party, an exactly equal risk was sloughed off by 
>the 
>counterparty.  So, while derivatives markets do give birth to speculators 
>(those who seek out the risk because they want exposure to the opportunity 
>for rapid appreciation) the speculators are compelled to deal with 
>counterparties who must be taking an exactly opposite position.  Taking 
>the 
>pair together, no money will be made at all.  It cannot be any other way. 
>I 
>note that's a law of economics.
>
>>