| Derivative markets are complex. While they have | | | | areas of the economy are dependent on the |
| become necessary for our large economy to | | | | derivatives market. The stock market lost 50% of its |
| function, they also present huge risks. | | | | value as a result. For those who are in doubt, please |
| First of all, derivatives are a class of investment. | | | | consider that the size of the underlying real estate |
| They are mostly contracts based on market | | | | market is not sufficient to move the broader market |
| movements. These contracts are for a specific | | | | in this way. |
| period of time. So why are they necessary? Most | | | | Derivative markets are unregulated. They exist |
| importantly, they allow money to flow at higher | | | | without any central authority. Why is this bad? |
| levels which is needed to support an economy the | | | | Derivatives markets are so large, they can upset the |
| size of the United States. Without derivatives, banks | | | | delicate balance of capital and trade. Unfortunately, |
| would not be able to operate in today's environment. | | | | they are created and sold with only a perception of |
| They need a continuous flow of money to survive. | | | | value based on the markets themselves. This is |
| Derivatives are also used to reduce risk. Hedge funds | | | | dangerous as they are now layered so deeply that |
| are an example of derivatives that are used to | | | | no one really knows what they are worth. It is based |
| offset the risk of traditional investments such as | | | | on pure speculation. |
| stocks. They have a stabilizing influence that allows | | | | I believe that we need some form of exchange to |
| markets to trade at much higher levels. | | | | handle derivatives and some form of oversight to |
| It may be difficult to understand, but our recent | | | | prevent abuse. I am not for big government, but this |
| financial crisis was caused by the derivatives market. | | | | is not a black and white issue. It requires a great deal |
| In particular, credit default swaps were sold as a | | | | of understanding without political influence. I am |
| form of insurance to protect investors against losses | | | | somewhat troubled by the tendency of the |
| in mortgage backed securities. These instruments | | | | American people to rally around partisan rhetoric, |
| were sold in many layers that created a market | | | | calling for one extreme or the other. In this particular |
| bubble with little regard for the valuation of the | | | | case, an extreme in either direction will be disastrous. |
| underlying securities. This created a panic as other | | | | |