GLENNY J wrote:High risk derivatives trading is the reason that what should have been a contained mortgage crisis in 2008, grew into a major financial meltdown.
Well, if you thought that was bad, you ain't seen nothing yet...
It's estimated that the notional value of derivatives trading is NOW more than TEN TIMES the size of the world economy!
If just a small percentage of those deals go bad—astronomical losses will cause widespread catastrophic damage!
In 2008 the U.S. Government scraped together enough to avert complete disaster—but now?
You can't squeeze water from a rock! There will be NO BAILOUTS—and disaster will not be averted! The money is just NOT THERE!
Europe and the United States are both drowning in UNPRECEDENTED debt. We both have over-leveraged banking systems that are no more stable than a house of cards.
The only reason it doesn't look quite as desperate here as it does there—is because the Federal Reserve is flooding our economy with worthless paper money like there's no tomorrow!
But with absolutely nothing to back it up—it's a delicate facade the Feds can't sustain. And when it crumbles, the nightmare won't be far behind!
Just a thought... KEEP SMILIN' JIMMY
I have been told...that There used to be a phenomenon in the early 1900''s in America, where parlors were set up to facilitate hedge fund trading against the markets themselves (Basically betting against wall street). You can imagine the conflict of interest this presented for US economy.
For those who do not understand what a derivative is, the short answer: is a financial instrument that by itself has no value, and is usually associated with risk.
When you buy a house, the loan is something of value. A derivative of that loan would be the sale of a
speculation or risk about the unrealized gains from that loan. It goes like this:
Pay me 80k dollars for this home loan, valued at 100k, and you'll get back your 80K + 20K at the end of the loan. The buyer of this package takes the gamble to realize a 20k return on his investment, but
has no guarantee of recovery if the loan goes into default. So, it sin his interest to set aggressive measure to collect and recover his balances.
As the 'seller' of the derivative, if you know ahead of time that your loan package is
doomed to fail and go into default (because the income of the home owner wont stand up to aggressive trading ) , you extract 80k now... 'Cha-ching', you made your windfall and the risk is out of your hands... You simply disappear and you don't look back. On to the next victim.
But, not only has the seller of the derivative swindled the buyer, but because
the buyer must take aggressive action to recover losses/gains, this practice now
puts undue burden 'against' the home owner. Where a guy might have been given a little grace to make up a month or two of mortgage (due to hard times), now there is no margin or slack. (This kills the solvency of the real loan)
This is what greed leads to... We blame Barney Frank... But all he was trying to do was help the little guy get into a home via govt backed loans. If
derivitives did not exist, many of those little guys would NOT be foreclosing...They'd be making it.
