There has been a lot of noise from the left and also parts of the right about something that was dropped into the 2015 federal funding bill. That something concerned the repeal of an important rule established by the 2010 Dodd-Frank financial reform. This rule required commercial banks to separate their risky derivatives operations from institutions whose deposits are protected by taxpayers, FDIC. The repeal resulted in headlines of this nature: "President Obama and Congress Just Gave Your Savings Account to JPMorgan." But before we go nuts, let's ask why derivatives exist at all? Why and how did they become such an important part of our economic picture?

The answer can be found, oddly enough, in Martin Wolf's new long book The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis. Wolf is the chief economics commentator at the Financial Times, and his new book describes his departure from neoclassical thinking and his resettlement in the region of Keynes. It's not that he is a Keynesian now. In fact, I would say his current position is the German Ordo school, particularly its critique of the financial sector, combined with a post-Keynesian branch that rises from the American economist who came back into fashion in a big way after the crash, Hyman Minsky (he is considered a heterodox economist). What Wolf points out near the middle of his book is that there was a huge demand for fancy securities and exotic derivatives in the years leading up to the crash because, simply, safe financial assets, such as the government bonds of wealthy countries, did not have the kinds of returns the rich and also the managers of pension funds desired. And so Wall Street only provided what their customers wanted: financial assets with spectacular returns. And such assets are always going to be risky. Low return, low risk; high return, high risk. The truth of this law was, however, obscured by triple-A ratings from credit rating agencies. Risky assets were made to look as good as cash in the pocket. This untruth was revealed in the crash of 2008. No one wanted these funky assets, and everyone wanted cash or traditional bonds.

And so, to begin with, the matter has nothing to do with scarcity—the hard economic problem. It's not that the real economy is bad or slow or not working. The fundamentals are indeed sound. It's just that the fundamentals can't generate the level of profits that can satisfy the rich, banks, and various types of funds. But here is the catch—and here is what Wolf misses, and what we all can learn from the writers of Monthly Review. The market can't on its own support these risks—the derivatives market alone has a notional value between $600 trillion and $1.2 quadrilliion (the size of the world economy is about $70 trillion). If something goes wrong, if the shock of reality hits these massive fantasies, if every investor suddenly fears the worst, then the whole market actually just dies. It can't live beyond a crash of this magnitude. The number of risky assets that lose value all at once is actually fatal to it. This is why the rich must flee to the safety of the US Treasury and transfer their losses to the public. The market is dead.

So, one, an economy that has financialized as much as ours is only possible with the backing or support of a powerful state. And, two, even if we were to "tame" the financial industry, all this would do is return the rich back to the fundamentals (in short, the 1970s), the real economy, the economic zone that does not make enough money to ease the grumbling and pains of their hunger. Why is this bad? Because it's not capitalism. To tame the financial sector is pretty much to do away with capitalism, which collapses, loses its meaning at the moment growth slows sharply and profits are squeezed to mere drops. This is the truth you find at the bottom in Larry Summers' melancholy "secular stagnation," an idea which the Monthly Review writers simply call "stagnation."

For those who are interested, I will be teaching a writing class on economics in the era of Thomas Piketty at the Hugo House in January.