The Global stock markets, commodity markets and many other asset classes have gone up significantly since the lows of March 2009. But these asset classes might still not be in a bubble stage. However, the global optimism is surely in a bubble stage. Its a bear market for negative and more realistic opinions which is generally avoided or countered with sharp criticism these days.
However, the fact is that the biggest financial crisis that was beginning to unfold has just been postponed for a future date. The Governments and financial institutions are doing their best to make the crisis look even worse when it comes back in a much bigger way.
In this article, I would primairly be discussing the commercial bank derivatives, which is just getting bigger with time and it has the potential to cripple the entire financial system.
The notional amount of total derivatives among the Commercial Banks in U.S. has increased from $95.6 trillion in December 2005 to $190.0 trillion as on June 2009. The chart below gives the details of the same.
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Commercial Bank Derivatives
Table Source: FDIC
The table above gives the segmentation of the derivatives contract among futures and forward contract, option contracts and swaps.
The current financial crisis took a serious shape from October 2007 when the Federal Reserve cut rates for the first time. So, even when the world was going through one of the worst economic and financial downturns, the derivatives market went up by 27% to $190 trillion from $150 trillion as on December 2007.
One of the functions of economic recession is that it cleans the system of its excesses. However, the unique feature of this recession is that it has laid a solid foundation for a depression and a big financial collpase.
