Derivatives Markets and the Destruction of the World Financial System
The Western financial system virtually imploded in 2007-2008, an event from which the economy is slowly recovering today. Banks across the US and Europe collapsed and had to be rescued by governments. Policymakers worried that a meltdown on the order of the Great Depression could occur. All eyes turned to a little known set of financial products known as derivatives as the culprits in this near catastrophe. What are derivatives? How did they, almost overnight, cause the destruction of well-known and seemingly solid companies like Bear Stearns, Lehman Brothers, and AIG? This course provides an overview of the derivatives and structured finance markets that traces their development and contribution to the financial crisis. Designed to be accessible to all, we address the building blocks of bonds, futures, swaps, and options. We will explore derivatives from 16th century Japan to the present. Historic asset bubbles, including the 17th century Dutch Tulip mania, the 18th century South Sea bubble, and the US real estate market will be considered. All these events will be related to both micro and macro economic concepts.