Your basic assumption seems to be, that the derivatives volume is much bigger than the real economy, and therefore it's bad. My problem is the "therefore" part of it. I agree with you on the mathematics behind it, but I believe in analyzing events, one by one, because people usually have more workaround options than models indicate.
When a large financial flood happens, flood insurers may get broke, flood victims may not get paid, real estate drops. However, nobody says that people will default on their debts as they do in the USA, and nobody says that this is a huge problem outside USA. I think most people in our village would continue without problems even with a 100% loss of RE pricing. Derivatives is a very fast way to lose money, but on the other hand, there is too much money in the world, and many derivatives seem to make those people lose money, that can afford it. It seems to me that many derivatives were used for retirement funds, and those funds are simply too big (imho).
The credit rating system broke completely. The old model doesn't work, and a new model is needed to replace is, there is no doubt about that, and in these days of IT, it means that many banks don't have an overview of their assets any more. It will take time to fix this, and meanwhile, there is a huge lack of overview in the sector. This is not about economy, this is about operations, organization, software and people. As time goes, overview will be restored.
Transactions between banks should be something that can be fixed as things stabilize, if things stabilize. Interbank trade will never be the same again, and therefore we will see a lot of restructuring of the financial sector, but that's just an improvement of things.
Based on the mathematical mechanisms, I would agree that things will collapse to below where the bottom would be. However, there is some inertia in the way that people think that pulls the other way. In people's minds, I think there will continue to be some bubble-era thinking. Many will continue to overestimate their own ability to invest money. |
