Derivatives aren't a problem so long as all counter parties are good for the wrong bets. When they aren't the entire financial system is at risk of collapse. We are facing that prospect which is a little worrying.
The interesting thing that you are all saying is that margin lending and unsound lending should be band. Politicians will also think this is the cure. I personally believe that this is the correct thing as well and over time it will pan out like this.
What this means however is that if we go down this path we will experience massive deflation. The entire reason why we saw a huge run up in asset prices was because of cheap dollars in bullish hands. Takes those dollars away by people not wanting to take on more debt and politicians mandating that this never happens again and you can guarantee that we will see a huge downward movement in asset prices from real estate, stocks, bonds and commodities. This will result in deflation, but we do need to get back to a stable system to operate within and this will be a good thing in time.
The Lehman auctions start soon. These auctions will sort out which side of the bets various players were on. This could result in everyone walking away relatively unharmed (score 1 for derivatives) or a few key players blowing up (score 1 for Warren Buffet when he called derivatives financial weapons of mass destruction).
I suspect, depending on the result, we will either see a big crash or a huge rally. The fact the market sold off big time yesterday and the fact it has been relentless smells like those in the know have an idea which way it is going to go. I suspect Warren might be saying "I told you so".
