In Defense of derivatives: between Enron, WorldCom, and Global Crossing, the controversial financial instruments have gotten a bad rap. Here's the truth

Reason, Feb, 2004 by Gene Callahan, Greg Kaza

As in any innovative venture, there are significant risks involved with the fantastic voyage finance has undertaken in the last 20 years. But increased government intervention is likely only to heighten that risk.

Gene Callahan (gcallah@erols.com) is the author of Economics for Real People (Ludwig von Mises Institute). Greg Kaza (kaza@reformarkansas.org) is the executive director of the Arkansas Policy Foundation. Rob Bradley, president of the Institute for Energy Research, provided research help for this story.

When computer programmer turned writer GENE CALLAHAN began to date his future wife, he was surprised to learn that in her job as a financial analyst, she traded in derivatives. "Is this woman in some sort of scare business?" Callaban wondered--and then read up on derivatives to convince himself she wasn't. Callahan is the author of Economics for Real People (Ludwig von Mises Institute, 2002). His coauthor, Arkansas Policy Foundation chief GREG KAZA, served for six years in Michigan's state legislature. When a local municipality lost millions of taxpayer dollars in derivatives, Kaza persuaded fellow legislators that the problem was a lack of transparency, not derivatives as such. The duo's article, "In Defense of Derivatives" (page 32), explains this much-maligned risk-management tool.