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While your primer accurately summarizes the principles behind the credit markets, it doesn't appear to address a fundamental issue: aren't private legal entities allowed to engage in private legal markets?

Yes, private legal entities should definitely be allowed to engage in private legal markets.

That is, you seem to be attacking the philosophy underlying the creation & operation of the derivatives markets. If so, then it appears you are blaming "greed" & advocating greater regulation; isn't this what Barney Frank and other Dems are claiming?

I have no problem with the original intent of Credit Derivative Swaps. I do start having a problem when investors are able to buy insurance on something that they don't even own and have no root financial stake in.

The real issue isn't the derivatives markets - they should be allowed to operate in any legal manner as they choose - these are PRIVATE contracts.

I see where you're going, but I don't agree with it. You're saying that the "fuse" was mishandled - which I agree, but the fact that CDS's had the type of potential downside that we're now seeing should have raised enormous red flags - and it didn't. CDS's have a very bad side when they're misused, so we can't discount that they're a defective financial instrument in that way.

The real issue was government involvement in lighting an inflationary fire. They achieved that by dictating to private markets that they abandon traditional lending principles in favor of public policy driven mandates.

That is what acted as the 'fuse' and it was insane to do. But the dynamite that the fuse is attached to is what will bring us, and the world economies, down.

You understand how the markets operates, but you're either waiting for Part 3 to reveal the true driver, or don't care to address this issue.

I have revealed the true driver - Credit Derivative Swaps. Lesson 3 will touch on what happens when there is a 'short squeeze' on a CDS.

You keep wanting to make the fuse the same as the explosive. Realize that a bunch of bad mortgages is not what is going to bring down our economy. We could clean up that specific problem with about $300 billion - which is the exact size of the bill that Bush signed on July 30, 2008 - and which takes effect in a few days on October 1st.

I see where you're going, but I don't agree with it. You're saying that the "fuse" was mishandled - which I agree, but the fact that CDS's had the type of potential downside that we're now seeing should have raised enormous red flags - and it didn't. CDS's have a very bad side when they're misused, so we can't discount that they're a defective financial instrument in that way.

So it appears you agree with Barney Frank, and that it was unregulated Wall St greed that got us to this point.

I, and many, many others, believe the underlying premise of the derivatives market is valid: to spread risk & increase liquidity. The problem is that core financial principles were based on faulty economic fundamentals which had been corrupted by poor public policy decisions.

We both agree that there needs to be a bailout; we only differ on the reasons. I think 'we' are collectively responsible because it was 'we' who allowed DC to disrupt an efficient market. If 'we' hadn't engaged in this behavior, we wouldn't be seeing a freeze up in the normal derivatives pricing mechanism.

“...the dynamite that the fuse is attached to is what will bring us, and the world economies, down”

Okay, how far down will we fall...look into the economic crystal ball you have...roll out how and how soon this is going to trickle down.

How soon will the Swiss start yodeling a different tune?