I found this comment at Cafe Hayek by Steve_o which I like very much. Go read it:
Derivatives are not securities, speculation does not necessarily involve derivatives, trading is not necessarily speculation, and there's about a dozen other things wrong with your general assumptions.
People recognizing that the value of something declining is not the cause of the decline. Imagine a horse race where trading bets is allowed until the horses pass the post. If the spectators see one of the horses suddenly start gushing blood halfway around, they are going to sell down his bets. That doesn't mean they caused the horses problem.
You may be a fine doctor, I can't possibly know. And I'm by no means the greatest expert on financial instruments. I am however confident that there is a lot I still don't know about financial instruments, and you know less than I. I've seen your comments over time about Wall Street, and it's clear that, like Oliver Stone, you just don't have the foggiest idea how it all works. It's just a cartoon of fat guys smoking cigars and passing pieces of paper around like some big game of musical chairs.
Those who are eager to sell financial instruments (or buy them) do a favor to everyone by helping to communicate the value of those instruments. I was just discussing today with a friend, the absurd "home value" on our tax forms. I know for certain that the value "assessed" on our tax form is a good 20K over the value we paid for our home, and will likely ever be paid for the home. My friend was looking at a house which tax assessment lists as $300,000- meanwhile the foundation requires major repair and there is termite damage. Likely, this home will not sell for another 5 to 10 years, and then someone will raze it and build on the lot.
Until a security actually has a transaction, the value is unknown. Our market system, because of regulations which aim to deny the negative symptoms (the thermometer of prices) causes an unavoidable positive bias to the market. In other words, if you're permitted from being a pessimist, the market will look sunny.
You can see this effect in simple classroom exercises. Pass out slips of paper with random gibberish on them- with a select few providing the good news about XYZ company upcoming FDA approval. Allow students to bid on prices. Those students who know the good news (either very savvy traders, or insiders) will keep raising their hands, bidding up the price.
When you do the same thing, but the few informative slips show the bad news about XYZ's FDA approval being rejected, those people should bid the price down. But, if you prohibit anyone who sees real news, instead of gibberish, from trading (preventing insider trading) then the removal of those people from the bidding pool will allow the bid price to go much higher than it should.
Speculators who sell instruments are like the clever child who shouts that the emperor has no clothes. The underlying causes of the "temperature" are not following the reading of the thermometer. As it is, empirical evidence shows that a small amount of insider only news (both good and bad) does begin to leak into the market, as shown by small movement in the price before "announcement days" of stock worthy news. What should happen, is insiders with both good and bad news should be allowed to move the price to it's correct value.
This would have prevented the Enron or Healthsouth debacles. The problem in these instances (and others), is that there is a curtain that the management can hide behind, while claiming the stock value is high. Decriminalizing traders would rip away the curtain that allows this fraud to be perpetuated.
There are a lot of other causes to the economic decline you mention. Debt being a big one. Forcing streams of cash flow to be based on people with no reasonable expectation to be able to pay their mortgages is a big one. The ratings agencies should be sued into bankruptcy. But, short-sellers, speculators, or derivatives traders did not- COULD NOT possibly "cause" the problem. We need more speculators, short-sellers, and anyone trading on information that they know; this is how information is brought to the price market.
What is unreal sir, is your ignorance of finance. It is not a sin to be ignorant, but to pretend to be, and to deride others from the base of your ignorance, while claiming to know something based on BS you've been fed from others who are as ignorant as yourself- that is, or should be, a sin of shame. If you have any.