RW: Yeah, a day trader. But is that who the securities market was intended to serve? It’s no different than going to a casino in Las Vegas. You’re making a short-term bet on something, and you happened to be lucky. All the more power to you.

JA: I understand the argument that the stock market is ideally a way of allocating capital to its best uses. But I’m not sure I personally believe it really works that way. Are we just not getting there because of failures like these products, or what?

RW: I don’t know if there’s a good clean answer to all of this. Traditionally, I knew what the securities markets were there for. I knew what futures markets were there for. And when people were introducing new futures contracts on a new asset class, they always had to make arguments as to why these are socially responsible instruments. And in that defense, what they had to do is make an argument that, “Hey, if I want to have a wheat futures contract, who needs that wheat futures contract? Well, farmers need that wheat futures contract. They have a lot of risk that they face every year when they’re seeding their land. They don’t know how much harvest they’re going to get per acre. They don’t know what price they can sell it at. But I can help him manage some of his risk. If I allow him to sell a futures contract on wheat, he could lock in the price at which he could sell at in the fall.” That’s a social purpose. All of the grain contracts were introduced in that way.

Are there natural bodies of hedgers on each side of the trade that either want to buy the contract or want to sell the contract? Then speculators step in and take up the balance, if you like. If there are more short hedgers, like in the wheat market, more farmers selling than cereal producers wanting to lock in a price at which they acquire the wheat for making breakfast cereal, then speculators will step in. That’s the natural state of affairs.

The point is that there are hedgers that need these contracts. OK, let’s go over to the securities market now. These people with their new inventions need access to capital. They create securities. When you buy a stock, you’re getting an earnings stream. You’re buying something productive.

What you see in instruments like these ETNs, you’re not buying anything but a futures position. And taking on a role as a speculator. Who’s hedging using these instruments? Nobody’s hedging. What you’ve done is you’ve provided a form for people to take daily wagers on price movements. They’re taking flyers. They could be lucky on some days.

That’s not to say I haven’t traded these things. I do it.

JA: I was going to ask you if you’ve used any of these products.

RW: Sure. Absolutely. But I think I know what I’m doing.

JA: If anyone does, it should be you.