On derivatives, it's actually pretty simple. We can talk about why notionals don't make sense, but let's avoid doing that. Of the current outstanding derivatives contracts ($632.6trn notional; $24.7trn mkt value), arnd 80% are actually interest rates products, i.e. interest rate swaps etc (this is based on the Dec 2012 BIS data here: http://www.bis.org/statistics/dt1920a.pdf). IR swaps, in fact, represent arnd 90% of the 80% of the total. Because of Dodd-Frank (one good thing that came out of it), nearly all interest rate derivatives are now cleared on one of the main exchanges (CME, LCH and Eurex). This is mandatory for the major currencies as of March 2013. The presence of the central counterparty clearing means that systemic risk is very much diminished (I can talk about why that is in detail, although this is pretty well-established).
But that's exactly my point! Laws, generally, are like laws that apply to drugs. Take an extreme example. If you're a government that makes loads and loads of stupid, unenforceable laws (not suggesting that your suggestions are like that), you're going to end up with a totally screwed up system, like, for instance, the Soviet Union. The result would be that people will still disobey your laws, even though you will be spending a lot of effort and resources trying to enforce them. Moreover, you're likely to get corruption and bribery as icing on the cake. The problem with your suggestion is that it requires a LOT of laws and regulations that are designed to prevent behavior, which, in my view, comes to a bankster naturally. IMHO, the result of such a system of laws is going to be what I have described above.
I thought swaptions were OTC? You mentioned more chetter re: central counterparty clearing. I'd like to hear more because I think the threat of a G7 currency blow-up is not out of the question in the not too distant future. The business cycle management by the CB's of the last 20 years is like bottling a Genie and those rumblings you hear from time to time are the stresses cracking the bottle.
Swaptions are not yet exchange-cleared, correct... That's coming, supposedly some time later this year, once the exchanges have all of their systems in place. Moreover, swaptions are only smth like 7% of the total size of the OTC derivatives mkt (by notional and mkt value both). Well, I don't know about blowups, but CCP clearing isn't chatter, it's reality. For the overwhelming majority of the swaps I do these days, central clearing is mandatory. If you're a dealer you had to start early as well. Obviously, there are still some old OTC deals that will remain bilateral for a while yet, but they're gonna be increasingly irrelevant as a proportion of the whole.
Could you? If 5% of JPM's derivative portfolio comes due in a 2008 repeat, they're done. That's 3.5 Trillion owing (70 trillion exposure). How does a central clearing party act as an effective firewall, in such a scenario? CME/EUREX doesn't have 10 trillion to backstop anyone. It's just buck-passing during a meltdown? I'm talking about system stability. All these major global banks have massive derivative portfolios, which, if even a fraction come due (remove ir exposure...fine), it's caput. Done. Pension funds and depositors alike are gunna take a hammer over the head. LCH/CME backstop or not. How is that wrong? And I think the assumption that all ir risk can be discounted, is mistaken. Had spain, italy, greece had their own printing press, they may have very well let rates go to the moon, defaulted, then jacked rates, to preserve the currency.
Firstly, I guess we do have to go into the mechanics of these derivatives. Say, JPM has $70trn notional exposure. Of this, $56trn notional is IR derivatives. To experience a loss of 5% of notional on these derivatives, rates across the curve have to move 5% (and every single trade in the portfolio has to be the same way, risk-wise). Even short-dated LIBOR rates during 2008 didn't move anywhere near that (worst was probably arnd 2 - 3%), let alone Fed Funds Effective (which is what the mkt has been transitioning to all these years). In other words, assuming a 5% loss on EVERY single trade in a large portfolio is a black swan too far. Secondly, LCH/CME isn't just about the backstop. There's much more to it. Initial margins are posted by clearing members, which means that everyone's IR derivatives portfolio is over-collateralized (for instance, LCH's SwapClear total initial margin is arnd $20bn). There are twice-daily collateral calls, which means that, at pretty much every moment in time, you either can provide sufficient collateral or your trades have to be terminated. CCPs perform automated netting/compression (for instance more than 20% of swap notional on LCH gets netted off). Finally, the key feature of a CCP is that, in case of a default, losses that exceed available margin are absorbed by several layers of the CCP's risk capital structure. LCH, for instance, has successfully handled 6 separate cases of default, among them the default of the Lehman portfolio (66,390 trades, $9trn notional). For that default, only 35% of Lehman's initial margin was used. Thirdly, removing IR exposure, the mkt value of all the derivatives is arnd $6trn and the notional is arnd $143trn. 5% of that is arnd $7.15trn. Total assets in just the US private accounts are at arnd $157trn (as of end of 2011). Obviously, anything can happen, but a priori I don't see deriv-a-geddon as a real risk.
Further, the exposure of 70tn is absolute notional outstanding, whch is probably netted across counterparties in a rather benighn way. Unfortunately, people take notional exposure as some number that actually has significance while in reality it's risk that matters. For example, 2s/10s and 10s/30s CMS spread options in the brokers market have social size of 1bn, so getting to trillion with fairly little risk is not that hard.
You repeat the drivel you read in mainstream articles without using your brain. Notional exposure has little to do with actual risk. As an exercise look up '18 ED options and compare premium cost vs. notional value of underlying.
Your argument is sound that laws created by states are not enforceable if people's behavior is against those laws. Natural laws (math, science) like gravity don't care much whether you enforce them or not. We should discover and apply those laws and whether they are written down or not is not material to me. You win but all of us (including you) lose. Why then have governments at all? We changed 10000 years ago and gave some individuals the power to guard and regulate our food supplies so that we would be able to get out of the survival of the fittest threat. Later that turned into the derivative we call money. Now those guardians have turned on individuals and have become the threat to individuals under the guise of making things better or safer. Power corrupts ... âNo man's life, liberty, or property are safe while the legislature is in session.â ― Mark Twain If we have no society then we have chaos and might is right. If we have an organized government out of our control, then we have might is right and not 1984 but Brave New World apparently: http://floatingworldweb.com/@EBOOKS/@PDF/ESSAYS/Amusing Ourselves to Death.pdf Individuals still have the power of numbers although integrity may require a price to be paid. The internet has the ability to replace brokers of all types. Government is basically a broker as well. That is why I suggest a public banking system run over the internet and lots of smaller entities using it. I guess in the long run, it doesn't matter much. No matter how hard organized leaders fight natural laws, only one side can win. Perhaps you are correct - there is no good organized society and thus no reason to try to build one. When the mathematics of exponential growth and debt forever finally chimes in with it's final blow, then we can say we were right after all - like the final scene in "fight club". Even though I lose arguments (LOL), one purpose for me is not to stop, but to try and change an outcome that I sense is mathematically certain. We all need to learn to put down our fears and take up again what put us here in the first place. Our behavior has to change before the natural laws kick in. We need a better peaceful society for individuals.