Okay, now I'm officially scared.

Ever since I did an article reporting how former Senator Phil Gramm slyly prevented the regulation of credit default swaps, I've worried about the shadow economy of financial derivatives--financial instruments bought and sold by large financial institutions off public markets, often to hedge or cover their wild and woolly speculation.

Now, The Motley Fool guys are pointing out that the trillions of dollars being devoted to the various financial bailouts--$13 trillion, by their count--comprise not much more than a drop in the bucket when compared to the total (and shaky) derivatives markets. Writing about Treasury Secretary Timothy Geithner's plan to mop up toxic assets held by big financial firms and other bailout initiatives, one of their site's bloggers notes

Fools may be right to question whether any amount of money will prove sufficient to sate the hunger of this deleveraging beast. According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".

Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do....

To be clear, a sizable disconnect remains between the number of casino chips presently in play and the pile from which more chips may be drawn as needed.

Wow. What if this derivatives market needs bolstering? It does seem too large to be propped up. (Imagine holding back a tsunami.) But what if it does collapse? I don't know. So much of derivatives activity is complex and opaque, and apparently few people truly understand it. But my hunch is, an implosion of a $684 trillion dollar market won't be good.

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