Except when they do. Tremendous amounts of notional and actual value disappeared in 2008, after all. Poof, gone. Most of it, by dollars, in securities.
I don’t think it’s the securities that are even necessarily the problem, though. It’s the idiotic, mindless risks that financial institutions take with them, to places far beyond what their own employees advise “ordinary” people to do.
Sophistication, IMHO, is not required. I view it as a moral wrong to gamble when you can’t cover the debt, and that includes leveraging yourself so far that you can’t pay the debt back because you’re sitting at 30-to-1 and the market crashes.
Excessive leverage is a moral wrong, in my book. I don’t care what short-term profit it creates. I don’t care that it might make my heating oil a few cents more a gallon (hell, I pre-pay a season’s worth of heating oil in July specifically because it actually makes sense for everyone involved).
I do recognize it, which is why I only get mad when the risks taken are so mind-bogglingly large and short-sighted that my dollars end up bailing them out because “too big to fail”. As far as I can tell, very few of the people taking the heavy risks actually got personally hurt, and very few firms went down the shitter where they belonged.
And the risks just keep comin’!
I think it’s morally wrong to buy risk you can’t afford. If you have the cash to cover it, buy whatever risk you want. If you’re leveraging or hedging, and a market crash CAN kill you anyway (let alone if it does or not), you are morally wrong.
Really, that’s the primary difference in our outlooks. But again, I view leverage as morally equivalent to playing at the casino with the family credit card, and hedging as taking both pass and don’t pass at the craps table.
There’s a better term here than “leverage”, I’m sure. I’m referring specifically to the act of borrowing on very little down to purchase stocks, bonds, or other securities, which I’m remembering as “accounting leverage”.
I’d be happy if something akin to Regulation T applied to all securities, as an initial fix.