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2/16/2010

The goodness of derivatives

I have been against derivatives in the stock markets and the financial systems for its high leverage and extremely high risks. The US subprime loan crisis was a result of the same instrument being packaged as very attractive long term cheap loans but sold several times over on a single diluted asset. In an article in the ST today, it was revealed that Goldman Sach was instrumental in saving Greece from its huge debt and still able to keep on spending more. Ingenious is the word. The process is very simple, offered a loan and lengthen the repayment period for as long as possible, and make repayment looks very affordable, maybe over 30 years or 60 years or even 100 years. And the loan was not recognised or recorded as debt in the accounts books. So no debt or debt free, while actually being weighed down by a mountain of debt. Such instruments of deferred payment to the unknown future, maybe the next generation to repay, will come in very handy in any country that thrives and encourages forward spending, or taking huge loans. It is the basic principle of spending now and pay latter. And borrowers were convinced that the future is always brighter and tomorrow will be better. So go spend now, with future money. Our high mortgages in our affordable housing ballon is built under the same premises. Young people are encouraged to take huge housing loans in the millions under the belief that their future income will see them through. At 30% of two incomes repayable over 30 years, it is actually 60% in debt. As employees earning a salary, no matter how capable they are, the chances of losing their jobs or incomes is always hanging over their heads like a swinging axe. But now they should not worry if they can rely on derivatives or swap instruments for help. Financial institutions should design more of such instruments in preparation of a surge in demands in the future should the economy take a dip and unemployment rises. Under the principle of future income, looking into 50 or 60 years ahead, they can design instruments along such lines. And the borrowers can happily go ahead and spend more, and borrow more. Derivatives and swap instruments will be the saviour of the day. Greece is saved for the day. Ooops.

2 comments:

Anonymous said...

this is tantamount to drinking a slow-acting poison to quench your thirst.

Anonymous said...

For the young, the housing load gets heavier and heavier. But they tell you it is still bearable. Just stretch it longer and longer. Then it becomes more and more affordable.

I like the idea. I hope nothing breaks the camel's back.