Do increasingly complex derivatives such as synthetic CDOs have social value?
I think they do and this is a theme of mine. Synthetic CDOs figured into this John Paulson scandal, where Paulson used a synthetic CDO to express an opinion he had about the housing bubble. He effectively put downward pressure on the housing market because he was creating a way for someone else to invest in the housing market without buying the housing market. That means that some demand for housing was shifted to the synthetic CDO, which should have reduced upward pressure on home prices or the prices of the securities in question there. I think it’s a good thing if we allow people who have negative opinions about a bubble to express them in the market. The fact that he made so much money doing that shouldn’t be a cause for public chastising. That money is his reward for seeing the bubble and that’s how a capitalist system works. Paulson is not under any indictment and I think that what he did is an example of a constructive capitalist response to excesses in the market. What are your
