Financial WMDs

The 60 Minutes examining the causes of the financial crisis helped me understand a litte bit better what's going on. (I apologize for the commercial at the beginning, but I thought it was worth it since the information given in the report is so helpful.)

The world's financial system teetered on the edge again last week, and anyone with more than a passing interest in their shrinking 401(k) knows it's because of a global credit crisis. It began with the collapse of the U.S. housing market and has been magnified worldwide by what Warren Buffet once called "financial weapons of mass destruction."

As Steve Kroft reports, essentially [derivatives] are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages. It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea.

Below, a 60 Minutes report from 1995 that predicted the financial meltdown. "07/23/95: Steve Kroft investigates what stock derivatives are and the dangers they pose to investors."