THEY have the power to get a public health care passed if it’s in their interests.

Spreads on the SPY are a penny wide due to these innovations and ECN’s that link to them.

Real estate for the MAJORITY…not speculators but the MAJORITY OF AMERICANS is their PRIMARY investment and its where they live ie: security. Residential real estate should always be viewed as a long term investment providing perhaps a return equal to inflation. Throwing off risk to another party ultimately invites speculation and creates price volatility in the underlying asset class and all the disasters that follow.

Was it not enough to see the 30 year mortgage rate stick to high levels while a perverse amount of capital ran to short term mortgage options that were thrown into cmo’s to hide the underlying risk, driving down the short rates and keeping the long rates artificially high??? Apparently not.

Watching this crisis unfold and how the worlds politicians, business men and woment and market particiapants deal with its challenges is like watching the insatiable apetite of the fat man in Monty Python’s movie ‘The Meaning of Life” which captures perfectly the current state of capitalism…we can only hope the outcome is not the same.

And of course what we’ve learned in the recent crisis (we have learned this, haven’t we?) is that zero-sum is the best outcome for a derivative. There are plenty of worse ones as well.

I agree that the health care rider is an unlikely product. But inflation-adjusted annuities can and do exist, and are inherently useful to most people. It lets the average Joe transform his defined contribution plan into a defined benefit plan.

I’ve said it before and I’ll say it again: the person most willing to take on risk is the one unaware he is doing so. He charges no risk premium. This is a competitive advantage which the market seeks out by Hayekian optimization.

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

Greenspan had it exactly backwards: those who shouldn’t be taking risk are precisely the ones who end up as a dumping ground for it.

P.S. Some people say things like “AIG must have known the risks they were taking”. AIG *managers* may well have known, but they weren’t the ones actually exposed to the risk. AIG *shareholders* didn’t know what risks they were exposed to or they would have sold in a New York minute (if they could find a greater fool). The modern financial industry is a mass of fraud, conflicts of interest, and breach of fiduciary duties from one end of the industry to the other.

For this to make any sense you need to deal with moral hazard type issues (can’t let an owner sell futures on his own property without giving them perverse incentives) and basis risk issues (if you can only sell futures on, say, a regional index, it’s a very imperfect hedge).

You’ve made 2 basic mistakes.

1. Confusing the complicated with widespread.

Fixed income and equities are asset classes where it is possible to have almost any type of derivative. In real estate, few derivatives are available. Real estate could benefit from more hedging products.

2. Confusing the current OTC market and its lack of transparency for possible transparency. Note that AIG was only 100B worth of money – not enough to have caused the economic crisis. Just because we were ripped off by Goldman in bailing out AIG doesn’t mean that these derivatives were the cause of the crisis.

“In 2005 why would someone have bought insurance against falling home values? At that time people believed home values only rose”

Speak for yourself. Some of us had seen real-estate cycles before and some of us didn’t forget it. Who are these standardized “people”? They don’t exist. Which is another part of the problem. Economists and media pontificators seem not to want to complicate things by having to know much about actual people. For instance, “fixed rate mortgages” are good for people because they can’t handle interest rate risk. Hello? Hello? Some of us grew up where the ONLY mortgages were floating rate. Some of us grow up with the idea that we can (and do) use multiple currencies. Some of us do have IO mortgages that WORK for us. Don’t talk about “people”, one size does not fit all in finance just as in clothing. Either that or I am not a member of the set “people”. It’s possible.