Global Financial wizard writer Will Hutton says ....It's the derivatives stupid....

[whistle]

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Without real leadership, we face disaster
By Will Hutton UK Observer, October 12, 2008

A lethal new threat is emerging at the dark heart of the financial system. We must have a unified global response or an already perilous position will become a calamity


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The problem is that the markets no longer have any faith that the world financial system they helped create has any future. The model is bust. It is encouraging that both the Americans and Germans are now moving towards what they considered ideologically unthinkable a fortnight ago - they are preparing to follow the British lead, take big public stakes in banks and offer guarantees to the interbank market.

But while this is a necessary condition for stabilisation it is not sufficient. What needs to happen on top is an assault on the dark heart of the global financial system - the $55 trillion market in credit derivatives and, in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments. This is a market more than twice the size of the combined GDP of the US, Japan and the EU. Until it is cleaned up and the toxic threat it poses is removed, the pandemic will continue. Even nationalised banks, and the countries standing behind them, could be overwhelmed by the scale of the losses now emerging.
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http://www.guardian.co.uk/commentisfree/2008/oct/12/marketturmoil-creditcrunch/print

[BlooInBloo]

1. Let's see how many people weigh in on this without knowing what derivatives are...

:rofl:


EDIT: And as the author makes clear, it's not derivatives per se that are the problem, but rather their lack of regulation:

In future, the global credit derivative markets will need to be organised into regulated, licensed exchanges rather than conducted in a way that made the Wild West look tame. We will need a global authority to supervise the credit derivative markets, write insurance contracts and stand ready to guarantee that contracts are settled. And we will need a global, independent credit rating agency to assess risk objectively. More immediately, there needs to be deep co-ordinated cuts in interest rates; last week's half per cent cut was useful but inadequate.

[aquart]

3. Derivatives were illegal. Now they're not. They ARE the problem.

You want to cling to the belief that something can be salvaged, go for it. But they need to internationally outlawed.

[panader0]

2. "credit derivatives"? Sounds great, where do I apply?