Marketplace Commentary 

By Paul Scheurer © 1995   Download audio from Paul's broadcast.

     A couple of months ago I went to the State Capitol in St. Paul, Minnesota. And at a committee hearing, I heard one lawmaker say, "We don't want to under-react and we don't want to over-react." Another lawmaker replied, "I'd rather over-react."

     They were discussing legislation in response to Orange County in Southern California. It's the county that went bankrupt because of a losing gamble on interest rates using derivatives.

     Of course there should be some laws to control how the taxpayer's money is handled, but what's the real problem here? And isn't information better than regulation?

     Looking at all the disasters with derivatives, I wonder: didn't these people understand one of the iron-clad laws of economics: that high return means high risk. Well, maybe not ... especially if they were trusting the advice of a commissioned salesman -- also known as a "financial consultant". Unfortunately, there is no free lunch in financial markets.

     BUT, there IS information in financial markets. And it's possible to use that information to get an independent evaluation of risk, a second opinion, -- the opinion of the market itself! It's away to use the power of the marketplace for the public good. And I'd trust the market any day over a salesman on commission.

     I'm not suggesting that financial markets are infallible. After all, you've probably heard the old saying that the stock market has predicted 9 out of the last 5 recessions. But the bond market does contain enough information to serve as a scale, a scale to weigh the risk of ANY investment in the bond market. Every state has something like a Bureau of Weights and Measures, and every state should also have a risk evaluation service on the Web for local units of government like school boards or counties.

     One final point: in 1994, investment brokers and bankers had 5 Billion Dollars in revenue from trading derivatives. Their customers lost at least 13 Billion.

     From Minneapolis, Minnesota, this is Paul Scheurer for Marketplace.