I have a horse with bad teeth. It’s lame, has no chance of winning any races anytime soon, and quite frankly, is only worth whatever the current market rate for glue is. Minus any processing costs, obviously.
You clearly wouldn’t be interested in buying this horse, would you? And if you’re not interested, then surely some banker or hedge fund manager wouldn’t be interested either.
But what if I had 50 horses? Or 50,000? Or 50 million? Now I have the attention of the banker and the hedge fund manager. You still think I’m crazy, but I’ll have you buying my broken horses before too long.
The hedge fund manager and banker see the great opportunity to diversify risk. They understand portfolio theory. They are much smarter than you. And me. At least they think they are.
Parcelled together, these horses represent something greater than the sum of their individual selves. They become less risky. Because as the number gets bigger, the chances increase of one of those dirt-cheap horses suddenly overcoming its issues, win a race, and bring in more money than the cost of the horses combined.
These bankers really are smart.
Only you know this story. You’ve heard it before.
This is the story of the US housing debt crisis of the late 2000s. Parcelling up a bunch of crappy debt. Calling it diversified. On selling it as a derivative. That’s how to make easy money. Until physics reminds us that things that don’t have value to power themselves alone, eventually crash and bring everyone whose been feeding and looking after the horses down too.
This occurred in a system with the worlds best value and risk analysts. Our food system is all about value and risk minimisation. Could we see it happen here?
Maybe. It appears to be a problem with derivatives. Only now we’re not talking financial derivatives, we’re talking physical derivatives.
Any nutritionist worth their salt knows that an orange is better for us than orange juice. That sugar cane is better than sugar. That a potato is better than a potato chip. And that a corn cob is better than high fructose corn syrup.
Bookshelves of inner-city Yoga Instructors have plenty of books agreeing with this. But our supermarket shelves continue to gain more and more derivative products, despite us knowing the risks and health consequences.