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Originally posted by FissionSurplus
reply to post by Strawberry88
No, I completely get where you're coming from. Many people in this country cannot afford to buy property. For a while, it was made ridiculously easy, hence the toxic mortgage / housing crisis that came to a head back in 2008.
I do see where it is going. They will break the middle class here and confiscate their property, most likely either because they are too behind on their mortgage payments, or because they couldn't pay their property taxes. These properties will be bought up by those with plenty of disposable income.
The only wealth the middle class in America has is wrapped up in their home equity. Remove that, and they become as poor as all the rest of the lower class.
The short answer: A derivative is anything that is valued based upon some other asset. In other words, it derives its value from something else.
The long answer: A call option, which is a simple type of stock option that gives the buyer the right (but not the obligation) to buy 100 shares of a certain stock at a pre-determined price, is a derivative because the value of the option depends on what the underlying stock does. In the case of GE stock options, for instance, whether the stock option makes money, loses money, or breaks even depends entirely upon what General Electric shares do. Thus, the options “derive” their value from GE stock. They are a derivative.
Although derivatives can help make the economy function by reducing risk for farmers, oil companies, startup employees, and more, left unchecked, they can introduce “systematic risk”. Only a handful of firms represent a massive portion of the total derivatives traded in the world meaning that if one of them went bankrupt, it could lead to a daisy-chain effect that caused all of the others to fail, wiping out the entire financial system.
The failure of Lehman Brothers nearly caused this to happen during the Credit Crisis and would have succeeded had it not been for the extraordinary intervention by the Federal Reserve, Treasury, FDIC, and other government agencies.
reply to post by Druid42
But I have to counter you with big oil. One hand feeds the other, and oil companies go down too.