Dr. Martin Hash Podcast

Derivatives, which are bets on the economy, are thousands of times larger than the real economy, so if the economy stumbles, magnify that by at least a 1000. For example, the number of foreclosures that triggered the 2008 financial crisis were minuscule compared to the economy, and could easily be absorbed, but the bets against them, the derivatives, were huge, and that's what caused the problem. Wall Street banks are essentially giant casinos, and a vast amount of the economy is gambling.

What you learn about derivatives in Frosh econ, that they are a form of insurance, seems reasonable, but if derivatives were a real thing, used like they are supposed to be used, then the maximum they should ever be would be the value of the commodity they were insuring, but they are 10,000 times that number! Insurance makes the economy more stable but insurance companies don't sell multiple fire policies on the same house, and they certainly don't let some random arsonists buy one on someone else's house. Before 2008, thousands of random people, including arsonists, had bought Fire insurance on somebody else's house, betting it would burn down, especially when they saw all the trash in the yard; and it's happening again.

Conservatives always try to blame regulation for the 2008, or any economic collapse for that matter, but it was when the regulation on leverage was lifted so that Lehman only had to put up 3% equity to borrow 97%, that was the beginning of the end last time, and it's happening again. Remember, all along the way, the people who made these highly-leveraged bets got to keep the winnings. The folks left holding the bag when the music stopped were the Retirement funds. Can you image the political fallout if everyone's retirement was broke!? Of course, the government had to intervene; and it's happening again.