Casino Royale: Derivatives and the Financial Meltdown Part 1

[britbox]

Jack, Thanks for the videos. I'm trying to get my head around how they work.

In your opinion, is this going to bring down the west as we know it? and how the heck was this allowed to happen?

[jack05401]

@britbox The finance crowd, doing its best in a shortsighted quest for easy fees, has really put us all in peril. The fact that there are approximately 1000 trillion of derivatives out there would not be a problem if all counterparties honored the obligations they took on. But these instruments are often traded three, four up to nine times and often to shaky financial entitities. It's hard to trace where they all are as there is no exchange for them and they private transactions. (con'd)

[jack05401]

@britbox Part 2 -- If only 1% of the counterparties fail (ala Lehman Brothers) then we will have $10 trillion worth of uncovered risk -- or 17% of world GDP. Combine this with the very high leverage banks, especially European banks, took on and you have the reason we are all so fearful of sovereign debt default of Greece or Italy or Spain etc. It will be Lehman Brothers cubed with God knows how many banks failing, exposing the derivatives pyramid to implosion.

[IExposeMormonism]

I don't know about the $700 Trillion, but the $134 Billion the two Japanese guys had in USA bearer bonds would be nice. You remember that? Two Japanese guys hiked out of Italy into Switzerland and got caught. It made about 2 minutes of news. $134 Billion.

[baidalai]

jack, your presentation is amazing! thank you so much for it! i study political economy and your videos helped me understand better derivatives. i have no background in economics/finance but i decided to take the course of political economy of finance because i feel it is unfair that all these instruments hidden behind elegant mathematical formulas have so much effect on our lives, yet we know so little about them. financial knowledge should be democratized so we know what's happening to us, no?

[pacom590]

so one thousand trillion dollars, that would be $10,000,000,000,000,000, right? Lol is that ten Quadrillion dollars? Wow, so let me get this straight, the WORLD economy is worth 60 trillion dollars or $60,000,000,000,000.

Hmm...so according to my math 10,ooo,ooo,ooo,ooo,ooo minus 60,000,000,000,000 is NEGATIVE 940,000,000,000,000. or 940 Trillion dollars.

I wonder how long that would take to pay off at a modest interest rate of say, .05%?

Prolly a really long time I'm guessing...

[jack05401]

Dear pacom590,

Thanks for the comment, the gist of which is spot on. A note for clarification: one quadrillion is one thousand trillion. This is the appoximate amount of derivatives outstanding at the end of 2008 (as opposed to 10 quadrillion). The point you make, though, is still valid even at one quadrillion.

Best wishes, Jack McMullen