Derivatives "economic time-bombs...hmmm...how many people here are playing derivatives? I say the housing market in Boston is a time-bomb.
It isn't normal people that do it. It is large corporations and financial institutes. But the problem is that there are sooo much of it out there. The total derivative exposure in the United States is over 30 trillion dollars. No, I did not mistype that. I said over because that is a 4 year old number. Total equity contained in banks is less than 2% of that. The vast majority of those derivative deals are over-the-counter, which means no federal oversight. Derivatives are nothing more than bets on future numbers. There is nothing backing them up. If there is a cascading failure of the type feared by Buffett, the damage to the financial structure of this nation can not be predicted or understimated. Derivatives are used to hedge positions, but instead of reducing risk, it often compounds it. For example, derivatives were used in Russia as a hedge against failure of the Ruble. The Ruble fell, the banks failed, and they were then unable to pay off the bets they lost to the people making the hedge. It ended up pulling down people who thought they were insured. > I say the housing market in Boston is a time-bomb Guess who are big players in the derivative game? Freddie Mac and Fannie Mae. If these guys get into trouble, you think they will back high-risk loads any more? What do you think that will do to housing markets?