World's Greatest Robbery

The most recent value of the derivatives market from the Bank for International Settlements in Switzerland, as of June 2008, is about 650 trillion dollars. If we take the value of all the stocks on all the stock markets, the value of all the publicly traded companies, and add them up, we get about 30 trillion dollars or less than 1/20 of the value of all outstanding derivative contracts.

What does this mean? These contracts are bets on the rise and fall of commodity prices, stock prices, weather; whether or not someone can pay someone else (a naked credit default swap) and anything else the wizards of Wall Street can bet upon.

In a worst case financial melt-down, the gaping maw of derivatives will consume all the world's wealth and still only be satisfied to the tune of 1/20 of all existing debt. The wealth consumed by the derivatives payouts is not destroyed, it is relocated, transferred from the many to the few who are on the payout end of these contracts.

If we do not zero-out the worst of these contracts, we will see the greatest wealth redistribution in history. When the trigger on a derivative is pulled, it is pulled based on some underlying asset, or ability to pay, failing a test written into the contract. Since the value of the contracts vastly exceeds the world's wealth, we have many bets with full value payout placed on the same base asset or action.

To survive this downturn, we must consider zeroing-out the worst of these derivative contracts. When Lehman Brothers failed, the underlying assets for 100's of billions of dollars worth of derivative contracts was destroyed. The shock waves from this, one of the smaller investment banks, failure caused world-wide lending to freeze-up solid. We can not afford one of the larger banks to collapse without first dealing with derivatives.

Once the nuclear weapon of the financial world, the derivative contract, is defused, we can start to unwind the failing banks and begin a true economic recovery.