Editor's Selection re Krugman and the Nuclear Option Against Derivatives

The Nuclear Option:The president will have to assume FDR-like powers to solve the derivative collapse.He should talk to all the leaders of all the nations in the world whose banks have derivatives. Then, collectively, they should declare all derivatives placed outside of legally regulated markets (90% of them) null and void. These "bets" - worth $180 trillion according the U.S. Office of the Comptroller of the Currency in America alone, and over half a QUADRILLION worldwide - could not have been made in regulated markets, because the players had insufficient collateral.If the parties object to the elimination of their derivative bets, they should be reminded of the penalty for fraud; it is inconceivable they did not know they were establishing positions far beyond their ability to repay.For every buyer there is a seller, so the amounts lost would zero out and no party would gain an advantage. We would just get to reset the clock. This is as fair as things can be made, given where we are.What is causing the panic in the markets right now is the realization that the losers have insufficient money to pay the winners. The domino effect of multiple collapses cannot be stemmed by any government, even by running the printing press overtime. The only solution is to wipe the underlying derivatives off the books and ensure these bets are never made again by creating laws to send those who make them in the future to jail.
— Scott Baker, New York City