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Derivatives amount to a casino game. They are pieces of paper whose only real value is derived from the anticipated value of some other tangible asset–such as mortgages on people’s homes. Wall Street banks buy up millions of these pieces of paper from local lenders, package them into inscrutable securities called derivatives, add a nice profit margin, and sell them to wealthy individuals, foreign governments, pension funds, etc.
The derivatives sold by Wall Street are actually bets that something will happen. Thus, in the case of mortgage-based derivatives, investors placed bets that the value of the homes underlying the pieces of paper they had bought would keep increasing and that homeowners would keep making their monthly mortgage payments. Millions weren’t able to, and BLAMMO!–the bubble burst.
But the financial crash wasn’t the fault of struggling, low-wage working folks who weren’t able to meet their obligations. That’s a cynical lie now being pushed by right-wing corporate apologists. Note also that the derivatives game created by Wall Street smarties is based not only on mortgages, but also–and much more–on the future value of everything from commodities like oil and pork bellies to shares of stock and the weather (yes, there are even derivatives based on which way the wind will blow).