Financial Weapons of Mass Destruction

October 15, 2010
Credit default swaps are just one kind of financial derivative - and were the root of the 2008 financial crisis. But what are derivatives? Can they be explained in layman's terms?  And how big is their economic impact?

In this interview, IMD Professor Emeritus James Ellert explains more about derivatives, sometimes referred to as OTC derivatives, and puts the size of the market into a thought provoking perspective.

According to the OECD and BIS, the volume of credit default swaps grew from $1 trillion to $57 trillion between June 2001 and June 2008, a compounded annual growth rate of 66%. 

That kind of growth is characteristic of the exploding market for Financial Derivatives, which Warren Buffet has called "Financial Weapons of Mass Destruction" and for which George Soros has called for an outright ban. The German government took some first steps earlier this year with it's ban on some kinds of naked short selling, which is already illegal in the US and other countries. But is further regulation on the way? And what is the debate all about?

For more on the derivatives debate, see this documentary "The Warning, "produced by the USA's Public Broadcasting program, Frontline.