He lays the blame at the feet of Credit Default Swaps for the negative feedback loop afflicting the current financial world.
Consider capital raising. Writers of protection in the CDS market must now hold increasing amounts of cash as margin against the probability of default for the "reference entities" or borrowers they bet on. This has led to the sale of tens of billions, if not hundreds of billions, of dollars, euros and pounds worth of securities to raise that cash.
Some of those buyers hold actual exposure in the form of bonds or supplier contracts; many more have just made side bets.
So CDS dealer sales of Citigroup equity through derivatives means higher equity volatility, then higher CDS spreads, leading to more margin calls, leading to more sales of bank stocks . . . This has become a system-wide tail-swallowing exercise in lunacy.
Just like bank runs of yesteryear brought the banking system to its knees during the 30's, CDS capital raising are running on illiquid assets. Just like the FDIC was legislated to prevent bank runs, I expect someone will look into this soon.
Hedging a credit default with a CDS is a valid excercise of risk transfer imho. However side bets (when you buy a CDS without holding the underlying bond that is supposed to default) INCREASES the systemic risk as bad debt is multiplied. If there is a bad debt of $1 you find yourself with a payout of N, N being the number of CDS contracts being written. This is why the CDS nominal world is many times the real economy. They are therefore agents of instability in the dynamic feedback loops.
SIDE BETS ON CDS SHOULD BE BANNED, STRAIGHT CDS COULD STILL HAVE A VALID ECONOMIC FUNCTION.