I hope to provide a simple summary of what I understand about financial derivatives from various good articles and YouTube videos in the net. I hope to explain my God given conviction of an economic flood or reset that the world will face soon with current observation of events in the financial markets. Will the pandemic be the catalyst that cause it through the unraveling of the derivatives bubble ?
The real cause of the 2008 financial crisis was the proliferation of unregulated derivatives during that time. These are complicated financial products that derive their value from an underlying asset or index. Let us look at the housing mortgage backed securities (MBS) as the asset example.
The US housing mortgages were sold to Fannie Mae to relieve the banks of more funds for lending. Fannie Mae resold them in a package of other mortgages in the secondary market. A hedge fund or investment bank then divided the MBS into different portions because of different default risks and then combined with other similar risk levels of other MBS into a tranche and resold that tranche to other hedge funds. Then the mortgage defaults happened and caused the 2008 crisis. These financial products were so complicated that nobody knew which part of the MBS was toxic, so nobody knew the actual value of the MBS. The secondary market shut down and banks and hedge funds were unable to sell the derivatives that were declining in value. Soon, banks stopped lending to each other altogether to conserve cash.
This financial derivatives market is complicated and unregulated. The value of these products are difficult to ascertain. It probably started as a financial tool to mitigate risks but has now turned into one monstrous gambling game. Since the 2008 financial crisis, nothing much has changed as far as regulation is concerned. The speculation in the financial derivatives has risen to new heights as a result. Presently, by some estimates, the derivatives bubble can be anywhere between USD 600 trillion and USD 1.4 quadrillion. The exposure of the major banks to this bubble is staggering. Warren Buffet called these derivatives financial weapons of mass destruction. And IMF stated that the Deutsche Bank is the biggest threat to the global financial system. Watch the following video.
https://www.youtube.com/watch?v=mSsH2dsW5-c
