My view:

Let's take credit default swaps. Their 'natural' purpose is obviously a hedge against bankruptcy. An investor e.g. holding a bond of a company can buy this 'insurance policy' to eliminate the risk of bankruptcy. For this purpose derivatives makes sense (the investors's point of view) and are of benefit to society (everybody).

But if there are too many CDS and these are also naked (market participants don't have the underlying bond) the CDS will lose the character of a true insurance policy and are more or less a bet on bankruptcy. Investment banks and hedge funds receive much more money if a government or a company goes bankrupt than if they remain healthy. This creates bad incentives. And the more 'layers' there are and the further the finance world is removed from the real economy the more opportunities for abuse (power, asymmetric information, access etc). The main problem I see here the unfair distribution of income (income $/effort).

There's some kind of pyromaniac firefighter effect in there.

Also, going back to the income/asset discussion: Derivatives only make sense for a small portion of all economic assets and are designed to protect a specific income. So I'm not sure the right 'pear' isn't the better denominator than the wrong 'apple'.

To be honest, I haven't fully thought this through but just saw the figure and was surprised how big it is.

BUT the frustrating part is that it is really easy to regulate the financial sector effectively and efficiently and it's still not done (properly). What's going on with the Volcker rule, btw?