I understand financial derivatives as a form of disaggregation. In the case of mortgages, for example, there was once a very rigid connection between the mortgage, the homeowner, and the lender. In recent years, the mortgage as a financial instrument has undergone remarkable disaggregation. Bundles of mortgages can be bought and sold to mitigate risk; the interest portion of the mortgages can be sold separately from other interests, which allows investors to speculate on interest rates or hedge risks; and so on and so forth.
As a result, mortgages became available to lower-income and more risky borrowers. Forget about the recent spate of news reports about crooked mortgage brokers; such people have always existed, and the press loves a negative story. Derivatives provide excellent benefits and they're here to stay.
Topics: · finance
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