Replies

That was a key element of the 2008 financial crisis. Derivatives aggravated the excessive lending to the housing sector by tapping new sources of capital through bonds collateralized by large mortgage pools, with credit guarantees added so as to provide assurance that such bonds would never lose their value and marketability.

Even worse, although derivatives aim to hedge risks as to specific financial positions, they were written in excess and lacked effective management, transparency, and regulatory oversight. This wave of imprudent derivative lending and associated credit guarantees. This created systemic risk by linking major financial players in complicated and obscure ways.

As the 2008 crisis unfolded, it quickly led to a chain reaction of threatened defaults as derivative credit guarantees were called. This began to cause the entire financial system to seize up as major financial institutions began to collapse for lack of liquidity and for lack of trust between buyers and lenders.

As it was, under Bernanke, the US Treasury, the Fed, and allied central banks and governments pumped out emergency liquidity. Asset values mostly recovered, the immediate crisis passed, and the economy of the US and the world was spared a recurrence of the Great Depression.

Unfortunately, the continued pumping out of liquidity -- the so called "quantitative easing" -- has come to be so accepted and relied on by the markets that it has led to distortions. Even worse, with rare exceptions, the US and other major governments have avoided the tax, spending, and regulatory cuts that are essential to full economic recovery. Without such structural reforms, the result is chronically high unemployment, low rates of economic growth, and diminished opportunities -- but with the world's bankers doing much better.

My idiosyncratic and populist streaks combine in that, unlike so many conservatives, I would fiercely attack Obama and the Democrats for protecting Wall Street and shafting Main Street and working people. Instead, so many conservatives seem to prefer to bash the Fed and pine for the gold standard, showing a lack of knowledge of modern economics and littlse sense of how to exploit an adversary's political weaknesses.