Econ Line of the Day

From today’s NYT story, Derivatives Tug of War Takes Shape by Floyd Norris:

Even when derivatives do allow financial risks to be transferred, that is not always a good thing. John Kay, a leading Scottish economist, noted recently that he used to teach — along with most other economics professors — that derivatives allowed risks to be transferred to those better able to bear them.

But, he added, experience had shown that to be wrong. Now, he said, he teaches that derivatives allow risk to be shifted from those who understand it a little to those who do not understand it at all. That is not a bad description of how the risks of bad mortgage loans were transferred from those who made the loans to those who bought troubled collateralized debt obligations.

Very well put.


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