One of most fundamental problems with how the financial crisis in the West has been managed is the issue of "too big to fail" banks. The argument goes thus: major banks and financial corporations such as the Goldman Sachs, Morgan Stanley and a number of others are too big and too "systematically important" to be allowed to fail and go into bankruptcy. These very large banks were responsible for the financial crisis in the first place by adopting an excessively risky behavior coupled with the fact that financial markets, prior to the onset of the crisis, were under-regulated for years.

By and large, they were turned into casinos of massive proportions. The losses made in this large casino have been disastrous. These very large banks were given excessive leeway in indulging in a diverse range of financial transactions, many of which were outright bets and speculation through such new and innovative financial instruments such as derivatives.

The result was that when a few large bets went wrong at the Lehman Brothers and a few other major financial corporations, the system came to the edge of the abyss. Their bankruptcy set in motion a chain reaction that wreaked havoc in the global financial markets. The financial crisis was quick in becoming an all-out economic crisis that sent much of the developed world into a difficult and long recession.

So these too big to fail banks confront the regulators, other participants in the financial markets including the people as both small investors and taxpayers with a complex dilemma: should these too big to fail banks be allowed to fail and go into bankruptcy as a result of their unruly and risky behavior or should they be protected and bailed out with public money every time they fail? If they are allowed to fail, the consequences would be disastrous.

If they are protected and bailed out, it induces more risk on their part and is unfair – this has come to be called as socialism for the rich and capitalism for the poor. In 2008 and 2009 we witnessed this and even right now during the ongoing financial in Europe we are witnessing it. These "too big to fail" banks are being bailed out and rescued by the European Central Bank, the Federal Reserve and the public money. This is because if they are allowed to fail, it would be disastrous for entire economies in the developed world as well as the developing world where economies in the emerging markets are exposed.

What cannot be disregarded is that these banks and financial institutions wield a great deal of influence in the corridors of power in the West. Their influence and power is extremely pervasive so much so that they are directly involved in policy making and taking decisions in some of the most important aspects of policy making in these societies.

So the influence of these banking interests is insidious and it is what has confronted the western democracies with a huge challenge: the runway and pervasive influence of commercial banking establishments has gone to the extent of rendering democracy meaningless and has caused widespread resentment and anger among the people.

The "Occupy Wall Street" movement and other such causes in the developed world are a reflection of this reality. This time around the common people, young men and women have diagnosed the problem correctly and have set their sights on what lies at the heart of an economic and political system that is taking away their rights.

Nevertheless, the banking and financial industry in the West should be cut down to size and its pervasive and corrupting influence reduced. This would be one crucial step to avert the decline of liberal democracy and the middle class in the West and to restore a fair economic and political system that allows a level playing field for all the members of society.

But the actual situation right now in the financial markets in the U.S. and elsewhere remains very grim. The excessive use of derivatives has crossed the $600 trillion and is still growing.

This mind-boggling figure of $600 billion is the worth of all the debt that private banks and financial corporations particularly in the U.S. owe to their peers and investors. This figure is more than 13 times the world's GDP. If this vast market of derivatives starts to crack, the floodgates would open and it would be the day when no amount of bailouts would be enough to prevent the chaos.

A particular kind of derivative that has been excessively used is the Credit Default Swaps (CDCs). It is a kind of financial instrument that allows the buyers of financial products to protect their investments against the possibility of default. They purchase these CDCs and insure their investments.

The seller or the issuer of the CDC will be responsible to pay the investor if the person who sells the original financial product ends up bankrupt or unable to come up with the money. Now that cracks are appearing in the whole system and the system is being kept alive through endless creation of money and credit by the central banks, these $30 billion CDC market has turned into a time bomb.

Many of these American banks are heavily exposed to the debt of troubled European countries. A default in any European country can set in motion these CDCs. It happened with the Greece when the government of Greece was extended a 50% write-down on its debt. But the banks allowed themselves the privilege of not activating the CDCs. This might not happen the next time. This $30 billion CDC market is one part of the larger $600 trillion derivatives market. The world is resting on a mega-large financial time bomb.

I have repeatedly maintained in my previous articles that the whole financial system in the West is being kept alive by creation of endless money and credit by the central banks, the U.S.'s Federal Reserve being the most important.

Trillions upon trillions of dollars are being created out of nowhere and injected into the terminally ill financial system to keep it afloat. Just a few weeks ago, we saw a $1 trillion dollar swap deal between the American Federal Reserve and the European Central Bank. This money will be used to keep the European banks afloat for another 12-18 months. But what about after that? Can this madness of money creation continue forever? Of course not, and with its end will also come the end of a terminally ill financial system that has long been on life support.