Re: Refco’s house of cards…
Paul wrote:
Don’t you think this vast explosion owes itself - in very large part - to the opportunities to avoid profit-reducing regulation and taxation? Sure there IS an element of “legitimate” hedging against true business risk (outside the vast hedging required to make the accounts look right for the regulators, shift categories of profit for tax reduction, etc) but has this “need” suddenly exploded in the last 30 years?
Certainly there’d be no need for a currency hedge in a world of fixed exchange rates. So in that sense, the explosion in foreign exchange trading and derivatives on exchange rates is a result of “neoliberalism,” if you want to take the origins of neoliberalism back to 1973.
But it’s not like we could really go back to the pre-1973 world, is it? Neoliberalism wasn’t just a choice between a set of options - it was a response to a real set of political and economic problems, like US inflation, labor militancy, declining profitability, restive colonies, etc.
And yes there is certainly the establishment of these instruments as an item of speculation. But these are not Rembrandt paintings, luxury homes or even pretty tulips. Eliminate the regulatory and tax advantages and what do you think will happen to the speculative market? Partly the speculative market is a speculation on short and long run changes in the value of these tax and regulatory advantages as other things change. Partly it is a long run tulip mania. (Plus a little bit of speculation in the change in the value in hedging against true business risk.)
No, most of the speculative juice comes from betting on changes in the underlying prices - and, if you want to get fancier, the relations between prices (e.g., changes in the spreads between interest rates on risky assets and in allegedly risk-free assets). A trader might load up on T-bond futures at 8:27 AM because she thinks that the US employment report to be released at 8:30 will show a gain of just 75,000 jobs, not the 200,000 expected by the market consensus. But of course it’s not all speculative; some airlines hedged their exposure to higher fuel prices and some didn’t.
Doug