Derivatives and Stimulus Money to Create Another Crisis?

Posted on Mi 15 Juli 2009 in misc • 2 min read

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    I agree with fund manager Mobius that derivatives are a bad thing but banks love them because they make a lot of money from them.  The problem I see is that all the recent acqusitions of failing derivative portfolios (Bear Stearns, Lehman Bros) by other firms, such as JP Morgan, allows fewer and fewer firms to have more and more derivatives.  All you need now is one large financial institution to go down and you'll drag the entire system down.

    Here's what Mobius has to say about derivatives:

    “Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

    Remember, too big to fail is very dangerous because large complex systems have to fight really hard to remain organized in the face of some large negative events.  In Nature, the more complex and organism is, the quicker it can destabilize.

    Regarding the stimulus money.  First off I love the stimulus money because my engineering industry is benefiting greatly from it and its preventing a lot of my friends from being laid off.  However, the long term danger I see is that we're either going to create another inflation boom or spend ourselves broke, maybe both.

    Here's what Mobius as to say about being stimulated:

    A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.[via Bloomberg]

    Most likely he's right but I'm not too sure about the timing of it.  I guess we'll have to wait and see.