Lessons must be relearned from most recent economic meltdown

Economists might not agree on how to revive our ailing economy, but they do agree that our present monetary meltdown was the result of a financial perfect storm. Still at the heart of it all is a cancer of greed too many Americans still overlook at our peril: unregulated credit derivatives. While investing in the market will always be a gamble, derivates are not a gamble they are gambling.

Some economists have called the use of this financial instrument casino capitalism, legalized gambling on stocks, bonds or mortgages, and you don’t have to invest to bet. Think of it another way. Derivatives are like bets on a college football game.

Recently, traditional Washpowers UW and WSU, with just one win between them, tangled in a forgettable Apple Cup match to avoid claiming the title of the worst Washington team in decades. What’s the difference between a friendly wager on that game and a derivative? Not much. Either way, you’re probably betting not on who wins but on who loses.

When markets decline investors lose money, but with derivative bets you can make money when stocks decline and people did. Hedge fund managers like John Paulson of the Credit Opportunities Fund made $3.7 billion not because the financial markets performed well, but because they didn’t. Paulson might have made his billions legally but not morally and at the expense of millions of hard working Americans.

One hundred years, ago credit derivatives collapsed the 1907 stock market, which is why they were illegal until the financial industry brought them back from the dead with the bipartisan supported 2000 deregulation of our markets. Our present financial crisis teaches us one thing: We get an F in history.

Derivatives in their most common form are credit default swaps and essentially an insurance contract subject to insurance oversight but deregulation made that impossible. Investors bought insurance on investments they didn’t own but in reality it was more of a side bet than insurance. Sound confusing? It is. That’s why Warren Buffett years ago called derivatives “financial weapons of mass destruction.”

Buffett saw this crisis coming, and while I would like to solicit his advice on how to resolve the present credit derivative crisis, he’s too busy cleaning up his own hypocritical mess. Buffett succumbed to the easy money and last year made a $37 billion derivative bet, that in this market isn’t exactly paying off. In March he was, according to Forbes, the richest man in the world but probably not anymore.

That’s why it’s going to be hard to clean up this credit derivative mess. It seems every financial institution has money in a derivatives market that does not have the money to cover, what some estimate to be, trillions of dollars of bets.

Harvey Goldschmid, a Columbia University law professor and former commissioner and general counsel of the Securities and Exchange Commission said recently on “60 Minutes,” “We need the most dramatic rethinking of the regulatory scheme for financial markets since the New Deal. If anything has demonstrated that imperative, it’s the economy right now and the tragic circumstances we’re in.”

Tim L. McKinley, a member of The Olympian’s Board of Contributors, is director of ministry to families of junior and senior high students at First United Methodist Church of Olympia. McKinley, who also works with the Pacific Northwest Conference Council on Youth Ministries, can be reached at tmacmckinley@gmail.com.