Soros has a great commentary on derivatives at his website. He says:

“This is a clear demonstration of how derivatives and synthetic securities have been used to create imaginary value out of thin air. More triple A CDOs were created than there were underlying triple A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors. The process went on for years and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue. “

Of course, the imaginary nature of securities should be no surprise to readers of this website, as I’ve been writing about this for a few years already. The real question is why it’s proven so difficult to regulate imaginary derivatives?

The answer: Because a huge part of our economy exists simply due to the imaginary profits generated by these synthetic securities. A ban on these securities would cause widespread unemployment in the Northeast US and many other parts of the country. Having a bunch of high achievers, most of whom are also incredibly bright, out of work, is probably the last thing the government wants, though it seems like we’ll need to face this bitter reality soon, rather than later. It’s difficult to see how imaginary securities with no value can form the basis of a strong and vibrant economy, even if they’ve magically supported our economy for nearly a decade.

The fact is that the trading of imaginary securities employs 90% of the people on Wall Street (Note: Wall Street’s other businesses probably lose money overall), and all of the myriad of businesses connected to Wall Street (i.e. law firms, technology providers etc.). What will all the lawyers do when there is no need for them to review the contracts associated with these entirely meaningless securities?

An interesting afterthought to the above is that the US is bankrupt, not because we don’t have enough capital, but simply because our best minds are employed in financial derivatives, rather than in pursuits that can benefit society and create real economic growth. The object of government legislation, and taxes for that matter, should be to encourage/stimulate labor in areas that will have societal benefits. This is why the best antidote to the derivative debacle is simply to tax all profits for derivatives, and any related businesses (e.g. lawyers who prepare the derivative contracts) at 99%. I can guarantee you that such a tax would end the speculative derivative market, and properly reallocate human resources to real economic pursuits, which in the end is the purpose of having a capitalistic society, in the first place.