Steve Waldman has a really
great post on derivatives, which clearly and compellingly sets out the Case
for Worry.
The gist is that in a $300 trillion derivatives market, there’s bound to be
a lot of counterparty risk somewhere. And given how the market is set up, one
major counterparty failure could set off a nasty global chain reaction, with
serious systemic consequences.
Another way of looking at it: what is that $300 trillion made up of? Let’s
say that everything is double-counted, and that you can somehow carve it up
ito +$150 trillion of positions on one side and -$150 trillion of positions
on the other. Then in theory the two add up to zero, and there’s no risk. But
in the real world, when you take sums as mind-bogglingly enormous as $150 trillion
and try to add them up, you’ll never be perfectly accurate, and there’s likely
to be a tiny error in there somewhere. Let’s say that tiny error nets out at
one tenth of one percent of the total. Well, that tiny error is now a whopping
great $300 billion risk.