 Quote:
Originally Posted by danm
"How big is the credit default market?"
Derivative market is about 500 trillion, swaps are a large portion of that (probably larger than our economy in monetary terms)
"Are we likely to see cascading defaults caused by closed loops (or more complex closed webs) where Company A insures the bonds of Company B who insures the bonds of Company C who insures the bonds of Company A?"
Yes, the bond insurers are next.
This is a huge deflationary event, the near money created in the derivatives market is quickly vaporizing. Deflation is impossible? Other than some trillions in housing wealth, some trillions in global stock wealth, and many more trillions in false credit all vaporizing, no, I'd say deflation is impossible. Right.
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Listening to the talking heads on CNBC on pretty informative special I was struck by a couple of points.
First, the potential for a financial disaster is certainly huge as DanM points out. 500 Trillion dollars in credit swaps is 30x the US GDP.
On the other hand the actual need to pay out insurance on these deals is very small. One of the CNBC guys said that corporate bond defaults in Nov. were at a record LOW. Assuming that everybody involved in the process can keep their heads and not panic we should be able to get through this mess. I also figure that people who have the most to lose are bankers and Wall St types and hence have a strong incentive to make the system work.
Not surprisingly Warren Buffett has been warning that financial derivative were weapons of mass destruction for the last few shareholder letters
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