I am inclined to agree with Suzanne Lainson (Jun 26th, 2010 @ 12:32pm). For a derivative to be minimally sound, there have to be underlying assets. Even in gambling, the gambler has to put real money on the table. For a futures market, that means the ultimate producer and the consumer have to be on board, because they are the only ones in a position to give assurances that there will be a supply and a demand for the commodity in question. Otherwise, you will find that the gamblers are the kind who abscond when they lose, rather than paying their bets.

Corn futures work because there really is a corn farmer back there, and he really does have a corn farm, and he really has planted corn, so he can sell futures against the crop. The nature of corn farming is that the farmer spends money on land rent and “inputs” (seeds, fuel, fertilizer, insecticides, etc) in the beginning of the year, and harvests and delivers his crop to the grain elevator at the end of the year, and the crop is actually sold to the ultimate consumers over the course of the following year, say an average of eighteen months from the time of expenditure to the time of payment. That reflects nature’s cycles of summer and winter. It is understandable that a corn farmer wants to “lay off” some of that risk.

Industrial and commercial processes tend not to work that slowly. They usually run at the rate of at least ten “turns” a year. Even the special case of shipping goods from China only takes a couple of weeks or a month. An industrialist who wants to reduce his risk exposure may try to speed up his process, sometimes by the addition of a durable capital good. There are already mechanisms in place to finance durable capital goods. You can mortgage them, or sell them to separate companies, and lease them back. The investment is tied to a definite piece of equipment. Let’s say it is a numerically controlled machine tool. That machine can be used to make something or other, even if the original purchaser should go out of business, and lenders are willing to write mortgages, on the assumption that they can always sell the machine to someone else, to make something else.

For example, the movie industry has been pushing the theater owners to adopt a system of fully digital downloading and projection, a la YouTube, and there has been a certain amount of argument about who is to pay for the equipment. This expenditure is not tied to any particular movie, and a theater thus equipped could easily be used to show sporting events, or in fact, almost anything an auditorium of that size, without backstage facilities, is good for. There shouldn’t be any problem about putting the digital projector onto the theater’s mortgage, like any other building improvement, unless there are underlying issues about the theater itself.

The movie industry’s performing talent is accustomed to being paid largely on a contingent basis, anyway, according to the box-office receipts or other revenues. The general direction of technological progress is to speed up movie-making, to make it easier to outsource selected production expenses to India, etc. If you carry technological progress to its ultimate limit, you have each actor working away at his own part in his own virtual reality nest, all of them in parallel, effectively making ten different short subjects, each ten minutes in length, at the same time. Think of it as being like the many different reporters in a newsroom, each working on his own story for the daily edition. Under those circumstances, it might be possible to make a feature movie in a week or less. All of these factors tend to diminish the financial risk in making a given movie. So the movie industry has no identifiable need to lay off risk.

Same way they sleazed through the online poker ban…