Derivatives: play it forward ... by gimleteye

Someone asked, in a comment, whether I even "know" what a derivative is. The reader seemed amazed when I called wetlands "mitigation" banking a form of trading based on derivatives. If any EOM reader is curious: the most important insight of this blog is showing the small gears connecting up to the big gears that first profited from the housing/construction asset bubble, fueled by derivatives tied to houses and in important respects, to the environment as well. The essential flaw of derivatives is mispricing of risk: built into the regulatory regimes of finance and environmental protection. I call them, two sides of the same coin. The Forty Year War against the Environment began nearly as soon as the nation's major environmental laws were passed by Congress in the early 1970's. The way this war played out was through a fervent belief by conservatives that regulations were onerous on private industry and needed to be thwarted wherever possible under the principle that government is the enemy of progress. One of the ways this happened in Florida was to bend, twist, and subvert regulations protecting wetlands. In wetlands, especially, the mispricing of risk is built into the model of land speculation. In Florida, the rise of "mitigation banking" for wetlands coincided with the fetish of free market environmentalism. The idea was simple: take a wetland important to developer, allow it to be destroyed in return for theoretically restoring something else, somewhere else. This conversion of a physical, natural asset into a debt owed and improvement of another place was the premise of mitigation banking. To learn what a clusterfuck this form of "derivative" trading turned into, read the 2009 book written by St. Pete Times journalists Craig Pittman and Matthew Waite, "Paving Paradise: Florida's Vanishing Wetlands and the Failure of No Net-Loss". On financial derivatives, check out our archive under 'housing crash', going back to the beginning of this blog and play it forward.