Wednesday, October 21, 2009

Derivatives “Gambling” By The Very Rich Destroyed Our Economy


The Very Rich Will Not Allow Congress To Regulate DERIVATIVES

Simple Explanation of Derivatives:

A derivative is a contract, that is all.

It "derives" it's value from something else ... the price of stocks, interest rates ... whatever.

If you have a contract that says that somebody owes you $1000, and you wrote a contract that says that you owe somebody else $1001. Then, in theory you are liable for $1, and the total "notional" value of both contracts is $2001 dollars.

However, in practice when the financial system goes to hell you won't get paid, but you will still owe 1001 dollars, even though you think you just owe $1.

So why is this important? Because the notional value of derivatives on Wall Street is 500 Trillion Dollars, and the economy is going to hell.

More simply stated, every individual in the USA is in the hole for over a million dollars. This should give you a notion of how much the Federal Reserve is willing to bail out Wall Street and hyper-inflate to keep the financial system from collapsing.

There is nothing wrong with derivatives per se, people make contractual agreements all the time.

However, when LTCM went bankrupt in 1998, the Federal Reserve said they would cover LTCM's derivative contracts - which was basically saying "don't worry about the other parties ability to pay, we've got it covered".
Ever since then, nobody cared and the amount of derivatives in the system grew recklessly.

Also, the housing market collapse, was really a collapse of derivatives that were based on the housing market.


Read also: Derivatives Explained: Pay Heed or The Buccaneers Will Rob Us Blind!


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