I was watching an episode of Frontline entitled "The Warning" which accused an unregulated derivatives market, influenced by Greenspan's Randian views, of being heavily responsible for the financial crisis the economy is experiencing today.
Most of my Austrian School friends said that the prime cause of the financial crisis was the Federal Reserve's massive flooding of the market with cheap credit.
How much of a role did the derivatives market have?
ht tp://www.pbs.org/wgbh/pages/frontline/warning/view/#morelink
Little-to-none. Derivatives are merely contractual agreements which limit risk. Overly opaque and complicated derivatives, if you want to go that far, emerged after the first Basel accord and all of its ad hoc regulations. Thus, derivatives were the result of new regulations (as opposed to deregulation). Either way, inflation is what caused speculation and the over-valuation of financial assets.
The derivative explanation is pure nonsense created by the economic illiterate left. Business cycles have little to do with regulation, though it may or may not magnify its effects (Smoot–Hawley Tariff Act, for example); there were business cycles before derivatives, and there will be business cycles after emperor Obama severely regulates derivatives (if he regulates them at all--Bernanke knows they had nothing to do with this crises).
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
So, the documentary was pretty much a condemnation of laissez-faire free-market capitalism?
1147196:So, the documentary was pretty much a condemnation of laissez-faire free-market capitalism?
That's probably part of it. It's the convenient explanation for those who know nothing about actual macroeconomic phenomena. Stations looking for ratings, and narrators wanting to sound authoritative, blame contracts they don't understand (easier than talking about capital theory). The Post Keynesians are really the only ones who blame regulation for financial crises (as far as I know), and it seems like they may go mainstream (god help us).
1147196:Most of my Austrian School friends said that the prime cause of the financial crisis was the Federal Reserve's massive flooding of the market with cheap credit. How much of a role did the derivatives market have?
Zero. The complaining about derivatives is just the normal BS you hear about 'speculators' during any crisis writ slightly different. People haven't by and large heard the word 'derivatives' much so it sounds fresh, therefore it gets more press. If they're bitching about the mortgage derivatives you simply have to remember that regulations and rules can allow and even promote the creation of bad debt, but without buyers what the hell is anyone going to do with that debt, much less derivatives/structured products based on it? The Fed provided the buyers, plain and simple. It's an odd application of Keynesianism I think in that people seem to thing "if you produce it, they will buy" which is bullshit. In order for people to buy bad debt they needed and got three things: easy money and credit; the lower interest rates for which also fueled a hunger for high yield, high risk debt; explicit and implicit guarantees of bailout should the debt go tits up. Without those three things, all provided by the government and The Fed, any bad debt or derivatives that were produced would have been sold to... nada. No one. Because no one would want it.