What struck me the most about Fab Fab’s emails wasn’t their maudlin tone or his low-grade ethical wrangling, it was this line:

When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invent telling yourself: “Well, what if we created a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?”) it sickens the heart to see it shot down in mid-flight…

What’s going on here? Why would anyone intentionally create something impossible to value? I think the answer is that it enables larger gains through speculation, and I’ll extrapolate and defend that position in this post.

So first, okay, we need an answer as to why trade occurs in the first place. Sustainable trade is positive-sum: both people benefit. An easy test to see how positive-sum the trade you’re doing is is by counterfactually jiggling the price around. I’d pay 20% more for bananas, and my local Giant Eagle would (and occasionally does) sell them to me for 20% less. Designer clothing is positive sum. Knockoff designer clothing is positive sum. Cigarettes and liquor and drugs in general are very positive sum.

Positive-sumness is not necessarily related to how repugnant a market is. Trade in horse flesh or marijuana would be very positive sum, but is outlawed. Numbers games and lottos are arguably zero-sum, but are run by the government.

Trade that is very positive sum — food, drugs, clothes, sex — essentially arises spontaneously. It doesn’t need a team at Goldman Sachs to create a new financial product for. And because of that, it’s reasonable to propose that all legal forms of trade up to some threshold of positive-sumness are currently taking place. That’s not the same as saying that capitalism is at the end of its rope or whatever, this isn’t a Marxist endorsement: there (probably) is a long tail of slightly positive-sum opportunities (tiny hedges all the way down) that add significant weight to overall well-being. One of these tiny hedges, somewhere along the line, is the ABS-CDO-squared Fab Fab was selling to Belgians.

Now if there’s not a lot of welfare gained in a transaction, there’s not a lot of profit that can be skimmed from it. But if trade is speculative — if it might not benefit both parties but result in one party losing and the other winning — the incentives are completely different. If your model of the world is better than your counterparty’s, you’re no longer limited by the narrow window of positive, welfare-creating value, but instead to a much larger world of profit. And the simplest way to make people disagree on the value of an item is to make it really hard to value. Obscurity emerges as a vehicle to get people to speculate against one another.

Speculative trade, of course, is very much unlike positive-sum, sustainable trade. And though Goldman will affirm endlessly that these trades were (positive-sum) “hedges” rather than (zero-sum) “bets”, it seems tautological that these trades were unsustainable: they are no longer being sustained.