I've been plumping for China as the beginning of the next end of the world financial crisis, but we cannot overlook the cause of the last one as a potential cause of the next one--financial derivatives, particularly the interest rate and credit default swaps markets. The gross exposures, as the linked article makes clear, are enormous. The bankers like to downplay gross exposures by noting that most of their derivatives exposures are netted out. In other words, they have a matched book; if they sell credit protection to one party they buy credit protection (a credit default swap, or CDS) through another party.

All well and good, until one of your counterparties cannot make good on its commitment, which is exactly what happened in 2008 with Lehman Brothers and AIG. Your netted out exposure then becomes a gross exposure, and once the banking system goes there, its exposure is many, many times its capital. The revisionist history from JP Morgan and Goldman Sach is that they did not need the bailout in 2008-2009. That is pure BS. Goldman Sachs was on the other side of many of the credit default swaps AIG had written and would have been sunk if those swaps had not been valued and paid off at full price by the government's bailout. JP Morgan was the largest derivative dealer at the time and would have been sunk as well. The derivative exposures have not been reduced at all. There was a lot of noise about putting the CDS market in a clearinghouse, but it couldn't be done. That market is way too large to capitalize a clearinghouse sufficiently to enable it to act as the clearing agent. Thus, the financial market is just as vulnerable now as it was in 2008. Read the article for more background and links to other articles.