Posted on 03/17/2009 3:06:43 PM PDT by Kartographer
As I try to make sense of the chaotic state of the country's as well as the world's economy I keep running across various articles that contain doom and gloom over derivatives and the fact that there are some unimaginable economic losses looming tied to them. So as a financial illiterate I am asking is there a 'bubble brust' on the horizon for derivatives and if so how bad would it be?
NV Dave usually provides an answer I can understand...and, without calling me an idiot.
So who should we get to call us an idiot?
I don’t mind being called and idiot, its being called a ‘useful idiot’ that will get me cross!
Taking Hard New Look at a Greenspan Legacy
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise...Alan Greenspan...
HERE's one take on the subject. It's why I think we'll have a deflation no matter how many billions/trillions Obama flushes down the tubes.
There will be a derivative bubble. It will be a spin-off and will result from the bursting of other bubbles.
Looks like the economy has a lot in common with the run away truck in the joke; When a trucker was asked what he would do if he was in his truck and the brakes went out while going down a mountain with a 500 foot drop off on one side, a shear rock wall on the other and another truck jacked knife across the bottom of the road, he repiled: “Well, I guess I'd wake up my partner Leroy.” The questioner asked: “What good would it do to wake up your partner?” To which the trucker replied: “Well me and Leroy have been driven together for 20 years and he ain't never see a wreck like the one we were about to have!”
It is important to make some distinctions about what/which derivatives are we talking about here?
When some of these apocalyptic numbers for derivatives are tossed around, with various huge numbers of “notational value” - we need to remember several things before soiling our drawers:
1. Not all derivatives are problems. Options on stocks, for example, are derivatives. Swaps on stocks, or single stock futures - all derivatives. And while they might cause “pinning” of stock prices on expiry days, they’re not a huge problem.
2. Bond market derivatives... now things get murkier. There are interest rate swaps, default swaps, interest rate futures, etc. These can become a problem, in particular the credit default swaps which have been abused in that outfits like AIG have written (or “sold”) a lot of CDS contracts for which they lack the money to deliver or settle the contract if the bond/CDO/CLO/etc over which these CDS contracts are written goes to default. There are many bond market derivatives, because the bond market is much larger (in dollar amounts) than the stock market.
3. Then there are options and such on commodities contracts.
So what is it exactly you’re worried about?
And understand, I do NOT trade bond derivatives. I’m quite happy to use options on stocks, but all I do with bonds is buy and hold (hopefully).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.