This column will be about obscenity and pornography, but before the reader gets too excited and the editor gets too worried, it is not about the kind of obscenity and pornography you would find to be unacceptable in your neighborhood newspaper. The Supreme Court has considered a number of First Amendment cases where the issue is whether a book is obscene. Among the factors the court has weighed is whether the material is “utterly without redeeming social value.”

I was reminded of this recently when reading a speech given by Adair Turner to a banquet held by the Lord Mayor of London in September 2009. Turner is chairman of the Financial Services Authority in Britain, which regulates most financial services markets, exchanges and firms in the United Kingdom. Attendees at the Lord Mayor’s banquet usually include all the leading players in the London banking and financial services industries. It is the British equivalent of being invited by Mayor Bloomberg to speak to all the leading lights of Wall Street. For a regulator, it is also like being Daniel in the lion’s den.

Lord Turner (his peerage was awarded for public service, not inherited) was talking about the kinds of financial engineering and synthetic financial products discussed in this column last month that were a major contributor to our current economic crisis. He stated, “Some of the financial activities which proliferated over the last ten years were socially useless.”

His opinion has been echoed by Stephen Green, who was the chairman of the British Banker’s Association and said, “In recent years banks have chased short-term profits by introducing complex products of no real use to humanity.”

Roger Lowenstein wrote in the New York Times in April 2010, “... collateralized debt obligations ... were simply a side bet … like those in a casino ... they raise a moral hazard ... irrespective of who is holding the hot potato when the music stops, the net result is a society with more risk.”

This raises the question: If gambling on such synthetic financial products is legal, does it need to have any redeeming social value? Turner attempts to answer this question by using the analogy of two guys in a pub choosing to bet on who can drink a pint of beer faster. Other people in the pub can make private bets about the outcome, and those bets need not have redeeming social value. So what is the difference? The difference is that the bets on synthetic collateralized debt obligations and credit default swaps were held on the balance sheets of major international financial institutions, and as such, they created huge systemic risk that brought the financial system to its knees when the bets went wrong. Many ordinary people who had entrusted their life savings to these financial institutions lost a lot of money. It may not have been clear to them that their “investments” were no more substantial than gambles on drinking a pint of beer.

Investment banks and hedge funds were creating synthetic collateralized debt obligations and selling them to their customers while simultaneously taking short positions for themselves on the same securities because they believed they were going to default. This has been described as buying fire insurance on someone else’s house and then committing arson so that you can collect on the insurance.

Although this might seem a little unethical to you and me, the investment banks did not see what people were so upset about. The extent of this difference in perception is probably best illustrated by the testimony of the CEO of Goldman Sachs before the Senate Permanent Subcommittee on Investigations. The committee had obtained internal Goldman Sachs documents that described these investments as “junk” and less polite words that mean excrement.

Senator Levin asked Mr. Blankfein, “Is it not a conflict when you sell something to someone and then are determined to bet against that same security, and you don’t disclose that to the person you’re selling to?”

Mr. Blankfein’s answer was, “In the context of market making, that is not a conflict.”

Between June 2007 and November 2008, Americans lost more than 25 percent of their net worth. The value of home equity had dropped by over $4 trillion, pension plans lost $1.3 trillion, retirement accounts lost $2.3 trillion, and other savings and investments lost $1.2 trillion. The total losses were greater than $8 trillion.

So what did our government do to help all those poor people who lost all of those savings? You guessed correctly – they came up with a scheme to bail out the companies that got us into this mess in the first place. The Troubled Asset Relief Program (TARP) was signed into law by President Bush in October 2008 and authorized $700 billion, of which over $400 billion has been spent. You will be glad to know that you spent $170 billion to bail out AIG, the company that sold the credit default swap fire insurance to the arsonists. These insurance policies were very popular and enabled AIG to post a loss of $61.7 billion in the fourth quarter of 2008. But lest you worry that AIG may not be able to continue this sterling performance, you have paid bonuses of $165 million to key employees so that we do not lose them. I should say that, in recognition of the current economic crisis, the employees did agree to accept slightly smaller bonuses. The civic-mindedness of some of our fellow citizens is very touching.

And what did the banks do with the money that the government (on your behalf) gave back to them? Did they use it to lend to businesses to get the economy moving? No – they took the interest-free loans we gave them and patriotically bought U.S. Treasury Bills. That way you and I can pay them an interest of 3.5 percent on the money we gave them for causing the problem in the first place.

At the start of this column, I promised you obscenity and pornography. I hope I have fulfilled my promise. I will leave you with Supreme Court Justice Potter Stewart’s statement that he may not be able to define pornography but, “I know it when I see it.”