Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

An analogy I often use in explaining the effect of CDS's and other derivate derivatives is the simple lever. Just as a lever increases physical leverage, derivatives increase financial leverage, allowing a small amount of money to effective control a much larger one. They thus act as amplifiers of market conditions.

Derivatives certainly amplified our current crash to some degree -- possibly small, probably large -- but they in no way engendered the crisis, nor even precipitated it, no more than a lever can, by itself, move a large boulder.

The crisis is a textbook case in government market meddling, just as was the Great Depression. You artificially suppress interest rates long enough, and you coalesce a large number of small business cycles into one massive one.