The derivatives market is a quasi-insurance market that the members use to hedge their paper trading. As long as defaults or bad investments are held to manageable quantity, then there shouldn’t be an implosion but that’s an assumption.
Reputable financial reseachers and analysts should be called into a task force to answer many questions on the stability of the derivatives market, the fallback positions in the event of a crisis, the pathways to implosion and the safeguards against those pathways progressing. Likely none of this has been done as it would call for regulation of an unregulated market.
Greenspan correctly assumed that free markets are perfect but in his ivory tower of Fedville he assumed that free market meant unregulated market and he did not bother to fully grasp that any market is never purely ‘free’; witness the oligarchy of interests in the derivatives market of this article. If membership is restricted, the market cannot be considered ‘free’.
But Greenspan and other political persons such as Graham took the ‘ideals’ of Reagan, one of which is the notion of a ‘free market’, and they used then to bar any oversight when in fact they were acting as gatekeepers to a very select club.
The derivative game needs referees because its failure can ruin tens of millions if not hundreds of millions of people.
The unregulated derivatives market was estimated to be $595 trillion a little over ten years ago when Greenspan and others shut out the CFTC from taking a look at its dangers for the purported purpose of preserving ‘free markets unhindered by government scrutiny’.
I loved Reagan but I also love justice. And I am sure if Ronald Reagan were alive today and in power he would have had a taskforce to deal with these dangers and also prosecute fraud. Because I would bet that behind the clearinghouse of the big banks are mechanisms to rig trading markets and to engage in massive naked short selling so that companies and their capital would be unknowingly at the mercy of a select few. It’s the new Rome, it’s called absolute power and I believe the bankers have acquired it or very nearly have. All that stands between them and their absolute power is the prospect of some governmental body looking at what they are doing.
One Quadrillion dollars is equivalent to a hundred years of output at current levels of the economy of the American civilization. There is likely a small risk of it imploding because of natural stability factors but the risk needs to be zero or so close to zero that implosion would be farfetched and all pathways to implosion would be monitored and nipped in the bud should they be seen to progress.
I say let America’s crazy uncle Ron Paul and his people get their nose into this. It would be no more damaging to unleash Paul than it would be in appointing a whiskey drinking drunk as commander of the armed forces (Ulysses S. Grant). My only concern would be if Paul and his people could be bought.
Just require that they have enough cash to cover their potential loses. That would be the end of derivatives.