Derivatives curriculum

In my CFA studies on derivatives this weekend, I read this:

Question: With the rapid growth of the market (for credit derivatives like credit-default-swaps), is a crisis brewing?
Answer: The main risks in the credit derivatives market are potential defaults, widening spreads,...Defaults are a given…or having a cluster of defaults will not bring down the system; we have weathered numerous defaults without adverse consequences in the past…one of the barriers is the regulatory environment…

My point is not to discredit the CFA curriculum, but rather to point out that sometimes curriculum is based as much on beliefs as it is on science. As someone I respect, Scott Klinger (a name familiar to some at KLD) once warned me when I asked for his advice on whether to go for a CFA credential (he is credentialed): watch out for their teachings on derivatives. To be fair, the textbook does say, “I believe default rates will start to pick up in the next few years and that this will be the primary risk that we will have to manage going forward.” I received this textbook this summer. The copyright is 2009 by the CFA Institute.

Derivatives themselves are not to blame, if the system allows for a safety net in case these risks do pick up. The credit-default swaps (CDS) involved in this crisis work like insurance. Just like any insurance, there are capital requirements. However, a “Modernization Act” in 2000, advocated fiercely by Phil Gramm, called for deregulation of such instruments.

Interesting huh?