>It is a crisis of overgrowth of financial assets relative to growth of real wealth /.../paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities.

Unfortunately, even former World Bank economists could have dismal understanding of modern finance. But everybody nowadays likes to sing a populist tune.

A financial transaction is simply passing of legal title of a real asset from one person to another. Think of a pension fund who wants to makes sure it will be able to pay future pensions to the widows and orphans and buys a corporate bond portfolio.

Of course, a pension fund will not want to manage each corporation in its portfolio. So it will buy securities rather than do direct lending, sit on company boards etc. The fund will try to diversify its risk among many bonds. This is the first step of separation of 'real wealth' from 'financial assets'.

When you have many pension funds doing the same thing -- buying corporate bonds diversified enough and be representative of US economy -- they are likely to outsource this task to a specialist. An 'index fund' will be creating a 'collection of corporate bonds' with desired characteristics (credit quality, size etc.), and all other investors will buy a piece of this index fund as large as they want.

Now we have removed 'financial assets' two steps from the 'real business'. Buying a share in an index fund is obviously not the same as making a direct loan to the corporation and a having dinner with the CEO. It is much cheaper, so more money is left for widows and orphans.

Here comes the last step. When large players (pension funds) buy or sell these baskets of securities, they don't want their brokers (investment banks) to get rich from all those commission on trading individual securities in it. So they pass the ownership to each other through so called swaps. A swap between two funds would look like this: 'Fund A to Fund B (current owner of the portfolio): I will take the risk of owning these bonds for a year. If they drop in price comparing to today, I'll pay you the difference. If they rise - you'll pay me. It's as good as if I owned the thing for a year. But you'll remain the formal owner'.

And these two would record the transaction based on the total value of the bonds, even though they are only risking the price difference between two set dates. And then the swap buyer may change his mind in a week's time and enter in another swap with another fund. So value of the swaps outstanding will grow larger and larger until it looks really scary to journalists and other clueless people. There has been $596 trillion of derivatives outstanding (as of December 2007). So what? It's a backlog of the transactions, more or less. If you off-set them against each other, you'll arrive back to underlying securities' value, and eventually trace it all back to the balance sheet of individual companies.

So there is no such thing as 'financial assets'. Each title associated with a financial paper can be traced back to a 'real thing', a real asset somewhere.

One should not forget that derivatives (financial assets etc. whatever) have made capital transaction costs very low. Low costs have led to more efficient allocation of capital and to great benefits to the society.

That's why a backlash against financial innovation is dangerous. I don't think we'll be better off by destroying the financial markets and moving back to barter.

Finally, if you want to find a real Ponzi scheme mastermind, this is Mr Greenspan and the US government in general. They were trying to prevent a bit of an economic pain -- a post 2000 dot-com slowdown -- by artificially lowering interest rates which had led to unrealistic pricing of capital everywhere, not only in the US. Which has led to property bubble growing and bursting (soon to be followed by US government debt bubble) and now we all face much bigger pain. But this should not be blamed on derivatives and financial markets. The easier it is to pass an ownership title on a real asset to another person - the better.