Derivatives and Ramen Noodles

From CNN Money. “Late payments on subprime loans have surged, The Wall Street Journal reported on its Web site on Tuesday, and while economists don’t expect major harm, a continued rise could hurt investors in mortgage-backed securities.”
“Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, the report said. It cited the bank saying that roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments.”


Note the line ‘Mortgage backed securities’ These are among the instruments that end up in derivatives funds, a market that now steers $370 trillion. As I mentioned in an earlier blog, defaults in sub-prime loans could be the straw that causes a domino style collapse of this highly geared ‘funny-money’ market.

$370 trillion. You need a computer to count that high. It nears four times world GDP. Anyone not alarmed by this is not paying attention in class.
A collapse of the housing market will surely have world wide implications, but the havoc it will raise in the derivatives market could have us drawing parallels to 1929 or worse, we could all be eating ramen noodle for the next decade!
Vern