When you see the New York Times is under attack, it’s easy to give into the temptation to cheer on the attackers. But you may want to resist that reflex in the case of the Times’ Dec. 12 article on the shadowy world of derivatives trading.
Some bloggers who focus on financial issues have taken the Times to task for (a) portraying the derivatives trading world in unnecessarily lurid terms (e.g., the title of the article talks about a “secretive banking elite” that controls derivatives trading) and (b) for slyly and predictably implying throughout the article that derivatives trading requires more government oversight and regulation.
Lawyers and economists have a lot of trouble defining what exactly are derivatives. Generally, the term “derivatives” refers to a family of financial instruments, the value of which is linked to an underlying asset.
Put another way, a derivative instrument is intangible, but is usually linked to something more “real,” like a contract for a particular commodity (oil, gold, etc) or another financial instrument (mortgages, for example). They can be extremely profitable investments, as the Times points out, even though they are intangible.
Read the article for yourself. I have tried to see the financial bloggers’ point of view, but it’s hard to go along with their critical assessment of the article in question.
For one thing, if the Times’ goal was to rally readers to the cause of derivatives regulation, how come the article makes no mention of all those former financial giants that were brought low in part because of derivatives deals that went awry? Wouldn’t reciting that list be a good way to scare readers into going along with the Times’ pro-regulation agenda?
The article could have referred to derivatives-related Wall Street casualties such as Bear Stearns, AIG, and Lehman Brothers, for example.
To really frighten people into calling their Congressmen and demanding more regulation of derivatives, the Times could have thrown in some quotes from former executives from these firms lamenting how they wish they had been more careful in entering into derivatives contracts.
But no such quotes appear. And names like Bear Stearns and Lehman Brothers appear nowhere in the article. (AIG is mentioned, but only in neutral terms, deep in the article’s text – and without claiming derivatives were the cause of its demise.)
Also – if the Times’ agenda was to turn the public against derivatives, how come the article doesn’t quote some critic of derivatives comparing them in an incendiary way to that great financial plague of yesteryear – junk bonds?
Or the Times could have quoted someone making the point that Wall Street has dabbled for too long with exotic investments like derivatives, and needs to be incentivized to go back to its old job – you know, of raising capital to assist American industrial firms expand, research new products, upgrade their machinery and create finished goods for domestic and foreign consumption.
That is, helping real companies make real things for the real economy – not pyramiding intangible paper contracts on top of intangible paper contracts.
Instead, the closest this article comes to encouraging crude economic populism is a single line reading: “Just how much derivatives trading costs ordinary Americans is uncertain.”
What? Gee that’s not exactly the sort of rhetoric that’s going to get ordinary Americans organizing Greek-style protests against derivatives traders.
Perhaps it was indeed the Times’ intention to stir up rage and fear against derivatives and/or just those who profit from them. Given that only financial bloggers critical of the paper seem to have noted the article, all that the Times seems to have succeeded in stirring up is continued apathy regarding derivatives.
