Thursday, May 13, 2010

Munger: "Separate Derivatives from the Basic Bridges of Civilization"

From an interview with Charlie Munger published in Forbes magazine yesterday. Munger apparently would make Paul Volcker "look like a sissy" when it comes to financial regulation:

"I would economically restrain what investment banks and banks do more than he would. I would separate derivatives from the basic bridges of civilization. We don't want civilization contaminated by extreme speculation. I'd ban all the derivatives trading except for metals and commodities. The new stuff is a marvelous gambling game. It swamps any commercial transactions that are needed. Gambling does not become wonderful just because it pertains to commerce." - Charlie Munger

He then added he'd make finance a less attractive place to be by possibly putting in place something like a Tobin tax on all transactions

He also points out Warren Buffett wrote a letter in 1982 saying that allowing the creation of the S&P 500 derivatives contract would do more harm than good. So he tried to prevent them from coming into existence.

Civilization would be a better place without them. 

Munger added that Warren can't help but buy a mispriced financial item. So they were still buyers of derivatives, at times, even though they felt they should not exist. 

Check out the entire interview

Adam

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