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The derivative market has driven finance 
further away from benefiting the real 
economy.
In its early days, finance centered around 
helping people get the money they needed to 
realize their ideas. Think of a bank providing a 
baker with enough capital to open up his own 
bakery.
But due to rampant financialization, those good 
old days are gone, and we’re drowning in 
needless transactions that aren’t doing us any 
good.
The rampant trading activity and massive growth 
in the finance sector is called financialization. 
The problem is, financialization helps banks and 
stock markets, but hasn’t had any positive 
impact on household income, small business 
growth or the economy at large.
Financialization started in the 1970s, when large 
institutions started trading more and more 

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securities, which are financial assets such as 
stocks, bonds and mutual funds. But what really 
pushed financialization over the edge was the 
emergence of a new market based on derivative 
securities.
Derivatives are like contracts that base their 
value on how well other assets perform. Based 
on the contract created, one party can end up 
benefiting from an asset’s price going up or 
down, depending on the kind of derivative it is.
One kind of derivative is known as a credit 
default swap (CDS), which allows a bank to 
protect itself against a borrower defaulting, or 
failing to make payments, on their loan or 
mortgage.
In a way, it functions like insurance: the 
institution investing in the CDS is promising to 
pay the bank in the event of a default, while the 
bank is promising to eventually reimburse them, 
with interest.
This is how we ended up in the recent financial 
crisis of 2008: too many banks were giving out 
loans to people who were in no position to honor 
them. Then, too many people defaulted on their 
loans, and suddenly all the institutions needed 
money from each other. The system collapsed 
upon itself.
This crisis was further impacted by technology 
that made it easier than ever for people to trade 
securities and derivatives, leading to massive 
artificial inflation of the financial sector.
These practices are tantamount to gambling with 
other people’s money, which, as the recent crisis 
has shown, isn’t helping anyone.