Saturday, June 30, 2007
Derivitives spread risk (like a virus)
None of this would need to cause trouble beyond a mere house-price crash and consumer slump – if only it weren't for the credit derivatives issued against so much of the world's outstanding housing debt. Running up debt – a promise to pay in the future – can only last as long as the promise comes good. Squaring that promise by issuing a derivative against it only increases the chance – and the cost – of it failing.