Most derivatives are a financial contract which can be used to insure against price movements (hedging), for speculation, and getting access to questionable intangible assets.
The actual credit risk of derivatives was about 3.3 trillion dollars although the total amount of derivatives traded over the counter was about 700 trillion in 2011.
Derivatives are frequently short term obligations and make it possible for wild speculation on small changes in interest rates, on changes in stock prices, on currency changes, on real and fictional bonds, and on unquantifiable assets. Pure gambling is the net effect.
Banks should not be buying and selling derivatives which are far too speculative and frequently have no foundation in real tangible assets. Banks should be forbidden to engage in pure gambling with central bank and taxpayer money which automatically guarantees banks against losses in the billions or even trillions.
A further disadvantage to derivatives is that their purchasing and selling begin to drive price changes of intangible assets so that the system can actually be rigged and price fluctuations begin to reflect the derivative activity. Big money is in charge and manipulates the derivative, stock, and interest market to their benefit to make huge big profits in a very short time.
Risk analysis on derivatives is done with complicated mathematical formulas which have no relevance in crisis financial situations and many are mislead into thinking that they know what they are doing financially when the truth is they don’t know at all how the system is rigged with big money moves dependent on the whim of the big money holders.
With so much phony money changing hands a small financial crisis can bankrupt many financial institutions or at least cause a severe liquidity crisis which benefits almost no one but big money and can lead to a major depression and plummeting of the stock market.
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