More critically, these risks can spread like wild fire as we saw in collateralised debt obligations and credit default swaps markets.

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And as the bond and credit-default-swaps markets expand, the stakes will get higher.

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The Fed rigged interest rates and big government rigged the rules to unhinge the subprime-mortgage, derivatives and credit-default-swaps markets, which the banks took full advantage of, and when the balloon went up they stuck out their hands for a Big Government bailout.

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Default risks, as measured by credit default swaps, are on the decline in the emerging markets and even better than a number of European countries.

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This is one reason why credit default swaps suggest India is already a bigger investment risk than emerging markets such as Vietnam and more than double the risk of Brazil, Russia, China and South Africa.

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The decision by the Fed to offer emergency liquidity to Bear Stearns and to facilitate its acquisition by JPMorgan Chase had less to do with the size of Bear's balance-sheet than with its central role in markets for credit-default and interest-rate swaps.

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There would be no collaterialised debt obligations, (CDOs), no credit default swaps (CDS), indeed much of the complexity of the financial markets would simply disappear in a puff of smoke.

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He also said the Fed is encouraging the development of a central counterparty clearing system for trading in credit default swaps and working on strengthening the resiliency of the short-term secured funding markets that left Bear in the lurch in March.

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Credit-default swaps, a type of insurance against bankruptcy, suggest that the borrowing costs of big emerging-markets firms have spiked along with those of their home countries' governments.

ECONOMIST: Emerging markets