Thomas Jefferson Quotes

Speculation meant real estate investment and business.

He distressed most of the other stock brokers on Wall Street by pointing out that if brokers were so smart, why would they not want to buy the stock for themselves rather than sell it to you. Therefore, he generally concluded that the best stocks are bought by the brokers and bankers for their own accounts, and the lesser quality shares are sold to the public.

Samuel Langhorne Clemens, 1835-1910

Despite this warning, and the hundreds of billions of dollars of people’s money that was lost on derivatives, and recommendations for not allowing derivatives to bought or sold by institutions who invest the public’s money, derivatives were not outlawed by Congress in its efforts to reregulate the financial industry.

The States sold bonds to finance the their efforts in the Revolutionary War. Some states had better prospects for redeeming their bonds than others. Georgia, South Carolina and North Carolina in particular had poorer prospects than most and their bonds were selling at about 25 cents on the dollar. Alexander Hamilton, then the Secretary of the Treasury, wanted the new Federal government to assume the state’s war debt and pay off the bonds. He made his proposal for how he would accomplish this on January 14, 1790. He delivered his report and proposal to Congress “Report on the Public Credit”. As soon as Hamilton’s proposal was read in Congress, sophisticated speculators set off for the Southern States to buy up as many bonds as they could before the owners found out that a Federal bail-out was under serious consideration. They could easily double, triple or even quadruple their money. Many congressmen wanted to outlaw the speculation. See {619929} & {619939}. The pro-speculation forces got their way. Some speculators made fortunes. Most bondholders lost money.

Credit default swaps were in large part responsible for the melt down of the economy of 2008 and the Great Recession thereafter. A credit default swap was one of the favorite derivatives that became popular. Is an insurance policy that a company will pay off its bonds and not go bankrupt. It is a cross between an insurance mechanism and a stock exchange type security mechanism, and through heavy lobbying, escaped any kind of regulation. It cost a company no money to write a credit default swap, and they were paid to do so. As long as business and the economy was good, it was a terrific business but there was no way of ever knowing how much risk they were taking. So companies who wrote credit default swaps did not have to have the money to pay to back them up. When that happened in 2008, even the largest insurance company in the world collapsed because of the risk of having to pay the credit default swap and the U. S. Government had to take over the insurance company. In 2010, the Obama administration passed a financial reform bill that began to regulate credit default swaps. Buffet, the American who had made the most money in financial securities, realized the great danger not only to the company, but to the entire national economy. Most of the rest of the financial institutions, could make large amounts of money without have to have much capital as long as things went well. So credit default swaps began to exceed the other financial instruments in activity. Neither the Federal Reserve or the other government regulatory agencies chose to regulate these risky instruments nor even to require that they be publicly disclosed -- See {637987}, {637986} and {637992}.