If Pericles was actually right, and derivites were just a completely benign financial instrument, that simply allowed people to hedge their bets against a market downturn, then the housing market bubble burst ought to have rescued the US economy, instead of plunging it to the edge of a financial abyss, that could be another double decade long Great Depression.
[Incidentally, the top US tax rate, just post the Great Depression, was 91 cents in the dollar? Perhaps we'll need it again, if only to ensure, those who gained the most from the patent fraud that was derivatives, will be the ones paying the piper, rather than the defrauded masses?]
The proof of the pudding is in the eating. And totally opaque derivatives, backed by more derivatives, backed by other derivatives, were really financial magic pudding?
And as the financially astute will bear witness, there is no such thing as a fair dinkum financial pudding!
But there are Ponzi schemes, fraud and confidence tricksters that will blind one with figures and almost incomprehensible science to "prove" otherwise?
I really don't give a rats that negotiable bearer bonds, backed by real honest to God assets, have been outlawed since whenever?
[Why and if true? Probably too easy to forge?]
I simply prefer them to totally opaque derivatives, is all I'm saying.
I didn't see die hard, which I'm informed had some bearer bonds inexplicably entwined into the plot?
But if they were as Pericles infers; then that could imply, those still in existence, and the genuine article, might still be honoured at face, or inflation adjusted value, by the US treasury or issuing authority?
And if true, then I would just as soon have a billion dollars worth of negotiable bearer bonds, as opposed to a trillion dollars worth, [an oxymoron if there ever was one,] of thrice removed completely opaque derivatives, backed by other derivatives, backed by mortgage security derivatives! Allegedly?
A very wise US Republican senator, when holding a guest spot on Q+A, some years ago, commented, that you always reach a point where complexity becomes fraud! Quote unquote. Rhrosty.

Ok, let's stop bickering and just concentrate on shedding some light on all of this.

Let's start with the big numbers.

According to the last Bank of International Settlements report I could find, at the end of December 2011 the face value amount outstanding on Over the Counter (OTC) Derivatives was US647.8 trillion

http://www.bis.org/statistics/otcder/dt1920a.pdf

That should be a big enough number to keep us all interested., yes?

Meanwhile, with that out of the way, the International Swaps and Derivatives Association (ISDA) keeps an eye on things through regular surveys.

http://www.isda.org/statistics/recent.html#2010mid

There's no need to wade through all the numbers - unless, of course, you want to - but there is one sentence that I would like to draw your attention to.

"As in past surveys, the $26.3 trillion notional amount [of CDSs] was approximately evenly divided between bought and sold protection: bought protection notional amount was approximately $13.3 trillion and sold protection was about $13.0 trillion"

The point is a simple one, but worth restating.

Even though the headline numbers look terrifyingly large, they largely balance each other out. In the above example, companies bought $13.3 trillion in insurance against the underlying value of the asset declining, while other companies bought $13.0 trillion in insurance against the value increasing. Net "exposure": $359.0 billion.

I know you might find this hard to believe, but the entire business of financial engineering at this level is absolutely fascinating. It involves masses of computer power, targetting tiny differentials in interest rates, currency rates, commodity prices and so on that need to be addressed in order to keep the wheels of finance turning. If they didn't, mines would not be dug, farms would not be growing stuff and so on. It is the lubricant of the system, without which the cogs would grind to a halt.

Blaming derivatives for the GFC is like blaming the football when you miss a kick at goal, or blaming the traffic lights when you drive through them and crash, or blaming the gun when you shoot yourself in the foot...

Pericles: Yes and there's another problem, Share trading by computer generated programs, that completely distort the market by massive movements, for just a tiny percent increase or decrease. Now that is something we could agree on, should be outlawed.
Are you sure the number quoted was 647.8 trillion rather than 64.78 trillion? Just imagine the compounding interest on 647.8 trillion; and or, who would pay it! I know, socialise the debt and privatise the profits! Cheers, Rhrosty.

We can all easily see the football, the traffic lights and the gun. A comparison with the complex financial machinations of skulduggerous global entities just doesn't cut it at all.

When a Great Financial Crime (GFC) has been perpetrated on the masses right across the globe, with the monetary system again teetering in the balance, the last thing we need is someone trying to pretend that everything that goes on is above board.

Try selling that to a whole nation of Australians who have had the kitty depleted (or completely emptied) and see how far it gets you.

There are so many ways of measuring money and, as with distances in astronomy, the numbers can be understood whilst simultaneously being beyond real comprehension – though the volumes can speak volumes…

For instance, Michael Spencer the group CEO of ICAP plc, based in London, which is the largest financial transactions services broker in the world (but not the only such broker) said on BBC Radio 2's Bottom Line program in February this year he found it incredible to think that they transact about £1 trillion per day.

Are they making money hand over fist? They can afford to charge a commission of about one pound for every £1 million transferred!

This single firm's revenue was in the region of £1,700 million last year.

I'm not jealous, but I wish my Visacard cost me 1/10,000th of one percent. And mine's a debit card!

It's called "economy of scale" (big companies can afford to their own staff rather than contractor, can afford to keep legal staff on payroll instead of outsourcing etc). This is the death of small business and one day the hamburger outlet or soft drink producers will own everything under this type of system. Too scarey for many people to (want to) comprehend.

This is what happens when you let business control government policies.