The NYT saw fit to write an editorial from the owners about how derivatives should be regulated. The editorial doesn’t talk about the different derivatives and how they operate, naturally. It looks to me as if the owners of the Times want the commodity markets under control. Well, they are under market controls today: they reflect real inflation. We are not a ZIRP economy, we are in a ZIP economy: zipping along to potential infinity. Meanwhile, the Derivatives Beast grows bigger and bigger and eventually will hit infinity just in time to see the value of paper currencies fall to nothing.
Naturally, since billionaires either own or are our government (Mitt Romney is merely one of many) we see no reforms that might interfere with their funky ways of getting rich which mainly consists of creating paper things that grow rapidly in monetary value while doing nothing useful. A Long Road to Regulating Derivatives – NYTimes.com
Even if they don’t cause a meltdown, unregulated derivatives are still an economic threat. That’s because derivatives have become deeply embedded in the economy. Pension systems use them to hedge investment risk. Food companies use them to lock in crop prices. Airlines and manufacturers use them to lock in prices for fuel or metal. But because there is no central exchange where derivatives’ prices are listed, no one knows if the prices banks charge are reasonable.
What is known is that the banks make billions of dollars a year on derivatives deals — lush profits that are surely higher than they would be if the market were transparent and competitive. Overcharging means that bankers are enriched with money that companies could otherwise invest in their businesses and that consumers could otherwise keep in their pockets.
The danger is, derivative paper deals that swap risks are replacing capital. I often write about how capital is disappearing. Everyone is pretending they are socking away savings here and there and using these savings for lending, etc. But this isn’t what is happening. When true capital is less than 1% of the monetary creation base, we get inflation and inflation shows up not everywhere at once but in select venues one at a time. Right now, it is showing up in education costs for college students, grocery stores, medical care costs and energy.
Most inflation was socked away by other governments wishing for a weaker currency than the dollar so, to maintain trade advantages, they would shovel trillions of US dollars into their FOREX holdings and then use this to fund loans to export industries. This process, over 40 years, has destroyed the US internal industrial base. But the derivatives game didn’t cause this, it grew out of this. Stripped of true capital, the US engineered the derivative swap game to replace it with this vapid form of capital which has no basis in reality so whenever any payoffs have to happen in these swaps, there is nothing in the holdings so the swap deal collapses into nothingness. Here is my response to the editorial:
Elaine Meinel SupkisBerlin, N.Y.
The problem isn’t trades in various commodity derivatives, etc. Well over 90% of all derivatives are INTEREST RATE SWAPS.
The Office of the Comptroller of the Currency used to regulate derivatives and still tracks them and this is the only way we know a tiny bit about these intra-bank deals in the interest rate swap meet.
But they only issue quarterly reports all of which, for over two decades, simply tracked the monstrous growth which saw these things go from less than a billion dollars in deals to over $600 trillion.
This entire system is now insane. When AIG went bankrupt, it was the entity supposedly used for insuring these same derivative-dealing banks from losses due to a bankruptcy but when Lehman Brothers went down, the entire derivative interest rate swap mess collapsed.
The Federal Reserve and EU central banks saved the world banking system from mass bankruptcy and now the entire mess hobbles along painfully. It can’t grow to infinity.
So what is it going to do? Exactly that: grow to infinity if at all possible. I say, eliminate interest rate swaps entirely, forever. Before they eliminate themselves via mass collapse.
Here is a great comment and there was more than one to this editorial, explaining things:
It is complete fiction to say that there derivatives, properly regulated, help to stabilize the economy. The only thing they have ever stabilized were the price of wheat, etc, farmers but that was before bankers were allowed to play. Financial derivatives have never, ever been regulated and have caused calamities repeatedly since the mid-90’s. When Brooksley Born first suggested regulating them under Clinton she was read the riot act. After the passage of the Commodities Futures Modernization Act of 2000, the OTC market exploded to gargantuan size. The market in these deceptive instruments, particularly the customized variety, depends on opacity. Regulate them and their profit disappears, both from a fee standpoint and from a tax-evasion standpoint.That’s why Dodd-Frank is so worthless.
The latest calamity is the worst one derivatives have caused, by far, multiple trillions in wealth destroyed and transferred across the globe, and it is ongoing. That the Obama administration and pathetically captured and corrupt legislators have left Americans and the economy STILL at risk in order to keep the secret gamblers happy is beyond criminal and unforgivable.
Former employees working on Wall Street also chimed in to explain how the entire derivatives swap game is a hoax. Time to end it.
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