...$516 trillion derivatives system ...
What? $516 TRILLION, theres not even that much money on the world.
Are they talking Monoply money? What is this hocus-pocus shnanagins junk?
I think it would be easier to understand the Unified Field Theory then to understand this financial stuff.
To me, it really is “betting beyond your means” and the time value of money run amuk.
When you buy a house, you don’t have all the money to pay for it. Instead, you take a considerable risk that you will pay for it over the next 15-30 years. Typically, it you did not have to spend one dime on living expenses, you could pay for that house in 3 years. But that ain’t real. Reality is more like those 15-30 years.
Similarly, a bank lends out more money than it really has. It is betting they will stay in business so long as people keep paying back those loans over time.
Options and futures - same basic idea.
So, these credit default swaps just follow from the same basic principle. I have to believe that the big banks are seeing this stuff is a mistake and they are going to find ways to cut back. I can only hope.
How?
Options and futures - same basic idea.
Same basic idea as what?