Derivatives A House Of Cards

Derivative bets are not a zero sum game and have far reaching consequences in the real world. Trying to regulate this complex market is easier said than done. These are usually lengthy complex legally binding agreements that are very difficult to dissect and often reek with possible contagion. I seek to call attention to the size of this market that has been estimated at $1.2 quadrillion, to put that in perspective it is about 20 times the size of the world economy. It is insane to see derivatives as an controllable tool to add stability to our financial system. By stacking risk upon risk and transferring it off to another party who may not be able to preform or is over-leveraged you do not increase stability. To make things more complicated cross border agreements blur regulations, legal jurisdictions, and laws. A collapse or default often results in years of legal wrangling and finger pointing rather than a swift payout or settlement. This is why I refer to derivatives as a house of cards. When one party fails these agreements are often so highly leveraged the transfer of the obligation or debt can put massive pressure and strain upon another party. We must question the quality of many of these contracts and worry about the potential of them to turn toxic. Contagion from insuring a contract or acting as an agent in case of default can be devastating with the obligation shifting to another party rather than simply vanishing. Again we are talking about paper and promises that can vanish rather than tangible and hard assets. The link below takes you to my full article about this potentially toxic financial product; http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html