Derivatives market

Congress passed the Dodd-Frank financial reform bill that included one element I support.

I support the creation of a public derivatives market. A derivative is a financial instrument that acts as insurance for the payment of another instrument made up of regular payments. You can have a derivative for a bond. The derivative would guarantee the payments for the bond.

So far, after two years, a derivative market has not been created by the financial institutions charged with that responsibility. That includes the SEC and the Fed.

Creating such a market would be difficult because each derivative can be from 40 to 60 pages long. It is a contract usually written by a bank.

My regular readers will understand why this market has not been created. You cannot get the government to do anything that requires intelligence and competence. You just can't.

What is interesting to me is that such a similar complex market has existed since 1610. It is called a bond market. Bonds are issued in many denominations for a single class of bond and with many complicated restrictions on payments and collection.  Nevertheless we have a bond market and bond traders are fully aware of the many complexities of the individual bonds they are trading.

But there is a contrast. The government was ordered to do something from scratch. The commercial market created the bond market over 400 years. Big difference.

Don't ask the government to do anything complex.

(Don't give me examples from NASA or DARPA.  Both are government agencies that used private companies for their innovation.)