Now watch 'laissez faire' or 'market fundamentalism' take the rap:

12 December 2010

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

You report that Goldman Sachs, JPMorgan Chase, and Morgan Stanley are using their influence over newly established derivatives clearinghouses to line their own pockets by suppressing competition ("A Secretive Banking Elite Rules Trading in Derivatives," Dec. 12). Now THAT'S a shocker!

Who would have dreamed that these politically connected Wall Street behemoths, after being bailed out with taxpayer money, would now be able to rig – for their own monopolistic advantages - the operation of the clearinghouses that our very own, democratically elected government engineered into existence in the wake of the 2008 financial meltdown? Surely you're correct to describe this surprising phenomenon as an "irony."

What bad luck.


Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

Gary Rogan writes: 

Besides the crony capitalism aspect solving the following concern:

"A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds."

with this result:

"They also share a common secret: The details of their meetings, even their identities, have been strictly confidential."

is indeed ironic.

On a related note I happen to be reading "Crisis Economics" by Nouriel Roubini and Stephen Mihm and they dedicate page 201 to the wonders of derivatives exchanges. With comments like "This idea makes perfect sense, as exchanges guarantee that derivatives will be cleared and settled in a straightforward, transparent fashion." and "In return, the clearinghouse would assume the burden of the contract in the event the counterparty failed. All this helps reduce the problem of counterperparty risk" and the rest of its statist analysis it proves one more time that one should never trust anyone who regularly goes to Davos.


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