In addition to revolutionizing the banking system and accelerating the international movement of money, it was the power of computing that made possible the explosive development of a whole new wave of sophisticated "products" called "financial derivatives" in the nineties. Since 2008, we have all heard about them, and they are usually hard to understand.
The essence of these "products" is supposed to be the opportunity to tease apart the different elements of risk, and market them separately. For example, if one buys the yen denominated bonds of a Japanese company, there are at least three separate risks involved. There is the risk that the value of the yen will change relative to one's own money. There is the risk that Japanese interest rates will change (at the discretion of the Japanese central bank. Remember that the value of one's bond, which pays a certain interest rate, will fall if the general interest rates in the community move up) There is the risk that the company itself is poorly managed, and defaults on its agreement to pay interest on its bonds. As an investor, you may be comfortable with your ability to judge the management of the company, but not so sure of your ability to assess the forces at work moving the Japanese central bank's position on interest rates, and not so sure you understand the forces operating on the value of the yen.
Bernard Lietaer compares this with a technology that would allow you (instead of just going to a concert) to choose your favorite tenor, your favorite violinist, your favorite conductor, and have them interpret your favorite opera. If you knew what you were doing, you might come up with a fantastic performance. Similarly, you might create a stupendous investment portfolio- you could buy shares in the company and shelter yourself against the volatility in the currency and interest rates. However, when it comes to separating the elements of risk for your personal investment portfolio, it seems that most people are really not up to this level of complexity.
In fact, it seems to me that we have all now heard way too much about financial derivatives. It seems to me that even most of the so-called professionals (in AIG, and Lehman brothers, etc.etc. etc/) didn't know what they were selling. Those who end up holding the most risk are usually the least capable of managing it, but in our recent financial melt-down, even those who were supposed to be sophisticates didn't know what they were doing. "Financial engineers" developed complex mathematical formulas about risk, and in the end, they choose to live in a world that has very little contact with ordinary human life. So they missed the big picture and we all went down the financial drain.
Once upon a time, a local bank offered local mortgages to people in the community who were thought to be a good bet to repay their loan. In those far off days, people had to come up with a sizable down payment as well, for the purpose of demonstrating their competence in the world of money. During the recent real estate bubble, banks "packaged" large numbers of mortgages ("pooled" them) and sold them off in "sections". A very small percentage of mortgage holders traditionally defaulted, and the "sections" could be sold for different prices depending on whether the buyers were willing to take a higher risk or wanted a lower one. The buyers who were willing to take a higher risk got higher interest. And so forth. But as we have seen, the end result was often that nobody knew who owned one particular mortgage (since they had all been pooled)
Bernard Lietaer wrote that these financial derivatives have come to stay, because used correctly, they are highly profitable. That part rings true for what I see as the shark pool of the professional financial world, whose interest appears to be profit no matter what the cost. He also says that used correctly financial derivatives are a benefit to society. I must say, the benefit is not clear to me, but I will keep reading. We are not going to put the computer genie back in the box, and there has always been more complexity than any of us can manage.
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