Feb

15

Can the truly enormous rise in the use of derivatives, complicated options, and highly structured financial instruments really have made a [corresponding] contribution to economic efficiency? - A Former Central Banker.

It's hard for most people, especially senile ones above 6' 6'' to understand that distribution of product is as important to well being as production. The Russians always had bad weather. The ability of people to invest in the stock market through ETF's and index funds, and to hedge through options would easily be just as important as a move from cassettes to head phones.

Rocky Humbert writes: 

This is a great topic, and I'm not qualified to express an opinion. But that never stopped me before.

It's not immediately obvious to me why ETF's should necessarily cause higher (and lasting) economic growth than say, "old-fashioned" index funds. Except in an academic paper, of course. What economic growth comes from the ability to trade a basket of stocks continuously…as opposed to say, at the close only? Is there any empirical evidence (except theoretical) that the growth rate of the economy has improved since the introduction of ETF's? I wonder whether it's even possible to study such a thing? Certainly, much of the growth from housing that was attributable to the mortgage "innovations" was not lasting, but was instead a zero/negative sum game. But does that prove anything?

I accept that when one reduces the costs of moving capital to productive places, that savings should find its way into more productive activities. And theoretically, the ability to hedge should improve productivity too. And liquidity should reduce hurdle rates TO A POINT. But at what point are there diminishing marginal returns — and does the transfer of risk from party A to party B *always* result in economic growth and a better standard of living (especially when taking the government's interventions into account).

Remember, finance is not an ends to itself. Rather, it's simply a vehicle for getting capital to places where it's needed.


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