CFTC Chair J. Christopher Giancarlo and CFTC Chief Economist Bruce Tuckman responded to criticisms outlined in the Bollettino, a document released by the Vatican that “lays out ethical foundations to govern economic and financial systems.” The CFTC leaders defended derivatives and credit default swaps (“CDS”), which were subject to particular scrutiny in the document.
Mr. Giancarlo and Mr. Tuckman emphasized that it is important to recognize the “social utility” of derivatives. They asserted that derivatives products help to “moderate price, supply and other commercial risks” which can facilitate economic growth and prosperity. Additionally, they highlighted that derivatives can be tools for risk transfer and mitigation, particularly in agricultural communities.
Notably, Mr. Giancarlo and Mr. Tuckman argued that in order for agricultural exporting nations to help “feed the world’s growing population,” they must have support from derivatives markets. They added that derivatives markets play a significant role in aiding return on capital, which they said supports investments in various farming technologies that are necessary to meet the global food demand.
Mr. Giancarlo and Mr. Tuckman focused on three specific issues related to CDS: (i) information asymmetries, (ii) speculation and (iii) profiting from the suffering of others. They argued that information asymmetry is an inherent aspect of a healthy financial system and that speculation contributes to the “generation of information and the dissemination of that information to the public at large.” They stated that proper uses of CDS “require a counterparty on the other side of the trade,” and speculators fulfill this role. Mr. Giancarlo and Mr. Tuckman further asserted that research shows that CDS trading on sovereign bonds (i) “lowers countries’ cost of debt and increases the information efficiency of their bond markets” and (ii) acts as “an important check on poor fiscal management.”
Mr. Giancarlo and Mr. Tuckman concluded that derivatives “help stabilize the price of global commodities and financial rates in a manner that is particularly beneficial to the world’s poor.”
Lofchie Comment: It is important that participants in our capitalist system be willing to step up to its defense, educate as to its social benefits and engage with its well-intentioned critics.