Quote:
Originally Posted by Snake Doctor
Honestly, as liberal as I am, I don't think it should be regulated. The government shouldn't step in and do anything.
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What happens though when institutions create leveraged products that threaten the entire financial system? If large banks and financial institutions are permitted to just fail with all the existing counterparty holdings and leverage out there we could have a failure of the entire financial system. Of course the Federal reserve is by law and design already the lender of last resort.
However the leverage problem is something else entirely. We already have such regulations on leverage for individuals. For personal securities accounts margin requirements are already regulated by the Federal Reserve Board and the individual exchanges. Why not have some sort of requirement for these derivative products? Are we ok with more than $500 trillion in derivative contracts and all the counterparty risk on top of that? $500 trillion against only $11 trillion in asset value? These contracts went from $220 trillion to $516 trillion in 3 years. Credit derivatives went from $4.5 trillion to $51 trillion in 3 years. Total US GDP is somewhere around $14 trillion.
if we're not going to regulate it would we be ok with say a quadrillion dollars in derivative contracts written by some banks and sold to other banks against an entire world GDP of $70 trillion or so?