Financial reform legislation, though long overdue, has the chance to send what has been a robust stock market recovery into bear market.  While the two party system works to discuss new legislation, all parties are ignoring a very important function of the derivatives market.

How Derivatives Work

Think of derivatives like a giant insurance marketplace where one person can bet against another person to hedge their own individual endeavors.  For this example, we’ll use two people, Jim and Joe.  Jim owns a small farm, and should the weather fail to produce enough rain his crop is in danger.  Joe, on the other hand, is a speculator, and thinks (for whatever reason) the amount of rain this year will be adequate for Joe’s farm.  The two agree to make a bet for $100, the amount of money Jim stands to lose if his crop turns out poor.

They work out the agreement, and Jim puts up $10 of collateral.  If the weather isn’t adequate for farming, Jim will receive $100.  If it turns out to be an excellent summer, Jim will have lost his $10 to Joe.  In either case, Jim will make $100 either way.  Either his farm will prove to be resilient and earn him $100, or Jim will pay him $100 if the weather isn’t good enough for his crops to grow.

Why People Hate Derivatives

One of the biggest faults with derivatives is that there is no actual product trading hands.  In fact, nothing but a minute amount of money is every exchanged until expiration, and one party has to make good on its loss.  You see, big banks and financial firms bet huge amounts of money amongst each other on all kinds of speculative investments.  At the same time, they also put up very small amounts of collateral, usually a few percentage points of the total bet.

Why Reform Matters

Current measures to reform the financial markets involve a hefty amount of derivatives regulation.  One of the key pieces of all legislation is to increase the amount of money firms have to put up as collateral when making bets.  So, rather than put up $1 on a $100 wager, firms would have to put up three, four, even as much as ten times that amount.  The reform bills are retroactive, so they’ll have to put up even more money for bets they’ve already made.

Why it REALLY Matters

No one really knows how much the derivatives market is worth but most suggest it is worth anywhere from $50-$600 trillion.  So, should investors have to put up more than just a few percentage points on their outstanding bets, they’re going to need a LOT of money.  Tons, and tons more than they currently have.  So, where are they going to get it?  The companies that make these bets, and there are many, will have to borrow or issue stock to come up with the money.

The problem is that in this post-credit crunch world there is very little available capital, and it would cost significant amounts of money to borrow enough to cover bets both in the past and present.  Should these reform bills pass, corporate debt yields will skyrocket, stocks will tank as they are diluted, and who knows how many firms might go bankrupt trying to keep up with new regulation.  So many variables, so few answers.

In another move to try and save the economy the Federal Reserve has cut it’s key interest rate to 1%. Some analysts are already calling for a move that might cut the rate to 0% in the not so distant future.

That’s right a 0% rate could be near. What does that mean for you? Well eventually savings rates would have to go down, but your ability to loan money would be better. Which for some, could be a nice relief given the recent credit squeeze that has created the need for the Fed to act in this way.

A 0% rate could signal what everyone is fearing. Deflation, little to no economic growth and the need for the Fed to act drastically to bring the US back to it’s feet after a credit crisis has nearly toppled the largest banks in the world.

So what do you do with our money? Well, we might suggest paying off debt and saving a little more in a CD or savings account. Locking into rates now before they go too low and you get nothing in return for allowing a bank to keep your hard earned cash to loan out.

But that’s just some of things you can do. Nothing is fail safe these days, except maybe sticking it under the matress.

With the worldwide credit crisis in full swing it can be hard to find a car loan to get that car you need to get around. When we were asked to review the UK based Credit Plus Car Finance site we didn’t even hesitate. We feel as though we need to get out the word out about any loans possible since it has been so difficult for people to get a loan period!

Car Loans have been some of the most difficult to get, so we’ve heard, mainly due to the fact that the car loses value so quickly and banks are having a hard time recouping any type of principle from a car loan. These types of loans, even if given to non-subprime loan applicants can be risky and banks just don’t want to do them.

In the UK if you need a car loan you need to shop around and Credit Plus is a site that makes it extremely easy to do just that, shop around for a loan. You are able to quickly compare loans, look through a database of cars that are available and then put the two together and get a great car and a great car finance right from your home. That way you don’t have to waste all the gas driving around looking for that car.