The Nation - The Obama administration promised to reform the financial system and make it safe for the rest of us, but recent Congressional action is more likely to reset the fuse for another explosive calamity. The time bomb in this case is that arcane financial instrument known as derivatives--the hedging devices that the big banks sell to investors, corporations and other banks to reduce risk or evade the requirements to hold adequate capital on their books.
As the financial meltdown demonstrated, derivatives do not reduce risk. They amplify it and spread it around interlocking networks of unwitting investors. That house of cards collapsed worldwide a year ago. It would be tragic to let the bankers build a new one. Some reformers think all but the simplest, most visible forms of derivatives should be prohibited by law. The president prefers instead to regulate them. Derivatives, his advisers explained, would be less dangerous if they were traded openly in financial markets, just like stocks and bonds. Regulators could then put the brakes on dangerous excess if they saw it developing. Anyway, that was the theory. Read more.