Ok, just winding you up with the title there. Derivatives aren't good or evil, they are powerful. I just completed 2 books that touched on derivatives this weekend.
is a very interesting read. His thesis on reflexivity is always fun. I will comment on two core components of his thesis, but am not sure I appreciate them fully, so feel free to chime in with comments.
- Falsifiability, in the Popperrian sense means by definition that economics is not a science, merely a pretender. I would agree with this, due to the fact human actors are participating, the rules are dynamic and reflexive. Any system that responds not only to outward stimulus, but to its own perception of that stimulus and guesses in the future is inherently non-falsifiable as the presumption of "knowledge" precludes hypothesis. It reminds me of my social anthropology training.
- Derivatives are WMD (weapons of mass destruction). I tend to agree with this quite a bit. Derivatives themselves have long left the "hedging" risk transfer function and have evolved into gambling instruments. As zero-sum instruments they aren't in themselves dangerous from a purely economic perspective. I do believe however that from a risk concentration perspective failed netting in CDS could lead to a massive multi-bank failure. The recursive nature of settlement failure in financial networks combined with CDS's sometimes fuzzy notion of EOD and settlements is a cause for concern. Centralized effective netting is a start to resolution, but needs to be put in place faster than is currently happening. These conditions when combined with the fact that many reference credits are over-written relative their value and may in fact be netting participants themselves is great cause for concern. The financial system is a belief system and will face challenges in the light of a major netting counter-party failure. Let's hope the appropriate central bank steps in as a back stop at the right time. It worked for Bear Stearns (a non-CDS) related issue, but that was a relatively minor problem. The CDS concentrations of settlement risk is becoming less of a vague risk and more a statistical inevitability.
Mr. Das, funny and thank fully un-politically correct look at the world of bankers and derivatives is an excellent view of the world through the eyes of someone with 25 years of experience a keen wit and a sharp pen. The veneer that is put on the overly compensated, overly dressed and dangerously unaware participants in the OTC derivatives market is very refreshing. It is nice to have the pretensions dropped by an insider. Everyone is in it for the money and those with the most information win. Customers are sheep for slaughter and traders use banks as either a veneer of legitimacy or the patina of patriarchal legitimacy. At the end Mr. Das calls BS when he sees it, which is pretty nice and makes for an informative read.
My only critique of the book is its audience level stretches too broadly. At one point Variable Basis Points are discussed and in the next instance basic bond calculations are mentioned. I think a good editor might have separated the specialist and the non-specialist bits. The humour and trader anecdotes are very true to form and dealbreaker worthy.