The Magnifying Effect of Modern Finance

In case that litany of problems isn�t enough to get the sweat beading on your forehead, ponder derivatives. While these hybrids have been around for decades, the rocket-shot rise of hedge funds and the advances in financial modeling techniques have spawned something of a competition among the so-called best and brightest to find ever-more-complex ways of skimming pennies from very large piles of money.

The collective result is that our financial system has been wired up to $370 trillion dollars of privately negotiated investment contracts. They�re usually written to shift risk from one bank, pension fund, insurance company or brokerage firm to another. And many are linked together in long chains, with each contract providing collateral for the next.