the problem with the economy right now is the expansion factor...with the derivatives trading pushing the leverage factor >way< too far.

Something is going to need to be done to reign this activity back in. Fed dropping interest rates is an enabler for this activity.

The fed dropping rates encourages folks to create more devices to increase return on money...like I said...its an enabler. The implosion of the mortgage industry is a great example of this. They extended themselves out of the safe zone...and in looking for better returns seriously pumped up the amount of high risk borrowing..and one quick turn in home buying erased not only the return...but a chunk of the base principle.

These hundreds of millions in losses, in turn, has blown up several multi-billion dollar derivative funds that were cents on the dollar leveraged against these loans. This is a huge magnification of what was essentially a controllable catastrophe.

Mortgage comapanies lost the revenue of the interest payments, but in many cases did not lose a huge amount against their base principle in anything but liquidity. They regained the asset borrowed against, the property. They have carrying costs, and often sell at below market to liquidate the assets, but that is their management choice to free cash to go back into their primary business of loaning it out.

[link|http://www.merkfund.com/merk-perspective/insights/2007-02-06.html|http://www.merkfund....s/2007-02-06.html]

Not necessarily agreeing with his conclusion...but the basic description of the issue is very good.

both are ok and the credit expansion is controlled by the policies of the banking system.

What is happening now is that a huge expansion is now outside of the control of the governments...this being credit derivatives.

They are bad because there is really no system of control over them.