Regulate OTC Derivatives by Deregulating Them

As a result of the current financial crisis, there have been many calls for strict new regulation of over-the-counter financial derivatives. This paper proposes, instead, that we return to the now-voided common law on derivatives and consider them non-legally enforceable gambling contracts except when one of the parties can prove a bona fide hedging purpose. Doing this would not outlaw derivatives, but would instead require the rise of private institutions to enforce and control them, and would discourage their use for wild speculation. The paper includes appended comments from Jean Helwege (Penn State University), Peter Wallison (American Enterprise Institute), and Craig Pirrong (University of Houston), as well as a response from the author