Imaginary Investments

http://en.wikipedia.org/wiki/Derivative_(finance)

You may notice, that this is a wiki page, and for all I know about finance, it could all be made up stuff, but for this post I'll assume it's factual and reliable. Essentially, the idea is that derivatives provide a means for investors (if that's the right term) to make riskier decisions and get greater returns/losses. Futures, speculation, and hedge funds are terms I heard about but never knew what they meant, but now I have something of an idea. From what I read, derivatives are deals based on the value of assets and other things, but don't involve trading the assets themselves. Essentially, if you invest a ton of money in derivatives, you're taking a lot of risk and could make a lot of money. But if the thing that the derivative is based on, say mortgages or debt or oil or natural gas etc, tanks and becomes worthless, you're SOL and incurred huge losses.

I get the idea that derivatives can be pretty dangerous, being that Warren Buffett called them financial weapons of mass destruction. They become a problem when someone who is responsible for many people's money, say a bank like Citi that had over $2 trillion in worthless assets (not sure how many of them are derivatives), you get big big big losses and people are like, "Dammit, you greedy bastards invested in risky stuff and lost my money." I'm getting the idea that derivatives allow big players and organizations an opportunity to seriously risk the finances of millions for their own profit. After losing so much money, we realize that our banks are broken and can't lend, so we give them tons more money, with which they will probably continue investing in high risk derivatives and giving unwise executives massive bonuses.

Derivatives are pretty much unregulated, so there are over $500 TRILLION in derivatives worldwide as of June '07. I'm not sure of the technical workings of this whole thing, but having that much money that isn't really backed by anything seems risky and idiotic. Letting banks acquire so many risky, worthless assets is the result of the free market, and Obama needs to take steps to make sure that our banking system is more conservative and responsible, and less risky. For example:

http://news.bbc.co.uk/2/hi/middle_east/7764657.stm

A lot of things caused our financial crisis, and while I'm not sure how much derivatives are to blame, I know they played a part. That along with the housing bubble, fighting expensive wars, having massive debt, and irresponsible lending brought us to where we are, and I think Obama can set our country on the path to prosperity again. He just has to succeed in regulating powerful bankers and executives and ignore the corrupting influence of the 43,000 lobbyists in Washington. Good luck Obama :-)

this is the proper site http://en.wikipedia.org/wiki/Derivative_(finance)

from what i can recollect....i may be wrong...a hedge is a form of a derivative and is used to offset financial risks...in the mortgage crisis this was used by "spreading" the loans out.

Example:

WaMu gave 100 million dollars in loans out at 9 percent interest rate and then allowed another bank to become part of the loan if it (WaMu) still recieved 3 percent interest...

In this instance WaMu sacrificed money it would have made in order to offset the risk of a bad loan...multiply this by billions of dollars and I believe that is how we are in this economic crisis

Essentially a good idea snowballed out of control. Let's hope our country learns from its mistakes, unlike the current fuel epidemic which could have been prevented if we learned anything from the energy crisis of the 70s.

it might be a good idea...but it was definitely abused by our nations' banks....which is why more gov regulations on banks = GOOD IDEA

Ah, but politicians operate on different logic. For them, bad policy = lobbyists = campaign contributions = bigger campaigns = more votes = good. Thanks to our polarized party politics, most voters in this recent election didn't give a crap about any of the issues. The nature of the campaigns and Bush's failures pretty much sealed McCain's fate. Thankfully, it looks like Obama, with his grassroots donations, can change the logic like this: good policy = campaign contributions = bigger campaign = more votes = good, essentially removing the lobbyists (I hope).

well lobbyists are a good concept...those are the people who meet WITH the politicians to push their points...

there are socialist lobbyists, education, environmental, and even cigarette...

but when politicians take BRIBES and run in order to appease certain small numbered supporters, THAT'S when it goes bad.

Unfortunately, a lot of politicians do take bribes because they are desperate for the holy little cloth-paper, the dollar. These dollars essentially allow them to campaign longer and reach out to more people, thus essentially creating job security. However, once this gets out people look at the other candidate as better because his/her bribes haven't been exposed yet and thus the public is oblivious.

But yea, lobbyists are everywhere in our government, and in every government for that matter. Whether or not they're called lobbyists elsewhere doesn't really matter.

I should probably not write things at 3:50am when I have a multivariable final in about...4 hours...crikey...

haha i agree with that exam statement....although im writing this at 6am with an econ final at 8

anyways lobbyists will always occur and they are neither good or bad they just are....its the POLITICIANS who make decisions which are BAD who are the bad ones.