Remember the hullabaloo about securities derivatives, such as interest rate swaps and credit default swaps? And their connection with subprime mortgages and collateralized debt obligations? With their role in the financial meltdown?
The left rails against derivatives. That CDS (credit default swaps) caused the financial meltdown in the mortgage market. But there was a much larger market in interest rate swaps, and there was no problem with fixed income assets.
And there was an even larger market in foreign exchange swaps, than in CDS, and there was no problem in the currency markets.
So derivatives were not the main cause of the financial meltdown. AIG lost $39 B on derivatives but also $24 B on mortgages with no derivatives. The counter-parties on derivatives were paid off 100 cents on the dollar.
The problem was the housing market.
After all, government excesses, such as poor monetary policy, produced economic problems, not bankers who become bystanders by necessity and happenstance.
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