This is the Cato Daily Podcast for Monday, May 18th, 2009. I'm Caleb Brown.

Those complex financial instruments at the heart of the financial crisis are as yet unregulated but derivatives themselves help investors

decide what risks are acceptable and which are not and they give powerful signals to others

in the market so says Cato Institute Director of Financial

Regulation Studies, Mark Calabria. You know, you and I might have a different

opinion over whether this company A is strong and whether they're going to go down.

You and I might also have a very different opinion of what the weather cycle is going to look like next summer

and whether a lot of hurricanes are a lot.

And you know, our differences in whether there are going to be hurricanes

that are going to be strong and make landfall

would impact our differences on what we think all state,

for instance, might be evaluated at.

So a lot of those things enter into, you know, people's evaluations of the products and differences and clearly even outside of one's differences in predicting the value of something and bringing that information to market,

there are also very big differences in one's willingness to bear that risk.

So the greater you were able to parse out those different risks, the more broader than more liquid

the markets will be, which overall makes everybody better off.

And also allows us to basically make trades across time as well across people.

Much of the argument surrounding the regulation of derivatives

has to do with this idea that derivatives are not traded out in the open, that they are not, that a shadow

banking system has been built up around certain financial products and there's not a lot of information that is just

out there and available. Is that true? Well in terms of aggregated information in

terms of you know where the contracts are what they price for the characteristic information in there are lots of information that's not out in the public domain and that doesn't mean

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