Free market fundamentalists say the real problem with our financial sector is that they are over-regulated. If we just let the banks regulate themselves that we wouldn't have any problems. Rush Limbaugh says Goldman Sachs is the victim. The government caused the problems with all of their rules and regulations.
Interesting. Would Rush go to a Las Vegas casino that wasn't regulated by the government? Would any of you? Would you trust that the casinos will regulate themselves? Don't worry, they won't fix the roulette table or cheat on any of the games because of the invisible hand of the free market. There's an invisible hand alright, it's the one reaching into your pocket.
If the casinos set their own rules and the government never checked in on them to see if they were cheating, only absolute suckers of the world would go to those casinos. Unfortunately, that's exactly the situation we have right now in our financial sector.
First, everyone understands regular derivatives that hedge your own assets or securities have a place in the financial world. They're basically insurance and have been around a long time. Second, everyone understands that free markets are very good at certain things like setting prices in well-functioning markets. But we also understand that the government has a role, such as barring monopolies and making sure our food supply is safe. At least, most rational people understand that.
The situation we have now in our top banks though is not normal market conditions with traditional derivatives. Most of the current staple of complex derivatives have no underlying assets. That means it's just one guy betting against another in a deal where neither one of them has a stake in the original transaction. Some of these are called naked credit default swaps. And they are in fact naked gambling. I don't know anyone who disputes that.
The derivatives market is now valued at $605 trillion. Except no one really quite knows the real number because most of these transactions are done in secret. So, this is beyond a shadow of a doubt the largest casino in the history of the world. Except the government doesn't check in on it all and most of the bets are done behind closed doors. That is a recipe for a disaster of epic proportions.
We have no idea if these banks have anywhere near the collateral they need to pay off any of these bets if they are on the losing end of the deal. Even Warren Buffett's Berkshire Hathaway is in a panic over collateral on their $63 billion dollars worth of derivatives. If Berkshire doesn't have the collateral, who does? My guess is absolutely no one.
If you force the banks to list their derivatives bets, the entire market will be exposed as a dangerous fraud with not nearly enough capital to sustain the magnitude of the bets. If you don't list the bets in public, then they will only get larger and blow up on us again, causing another worldwide meltdown. This is an economic catastrophe waiting to happen.
And today the Republicans blocked financial reform debate for a third time. The GOP is a wholly owned subsidiary of corporate America. We have to stop treating them as honest actors. The Democrats usually do a hideous job of calling them out on this, partly because they're afraid that they will also be exposed as corporate shills.
The media is wholly negligent in covering this issue and politics in general. When is the last time you heard on CNN that a politician was voting based on his corporate contributions? The politicians are largely driven by lobbyist money and that factor is almost never mentioned on television. Our political press is a joke. No wonder we have no idea the magnitude of the problem and what's causing it.
So, let me break it down real simple for you - it's the derivatives, stupid. The entire world GDP is a little over $60 trillion. The secret, unregulated casino market of derivatives is worth $605 trillion. Now, who thinks that makes sense? The banks are running a casino that is ten times the size of the world economy - and it is completely unchecked.
If you're paying a lick of attention, you'll see that spells economic doom. There is an iceberg straight ahead. We're headed right for it, as some idiots continue to argue that we should let the banks regulate themselves. Trust them; their secret bets will magically work themselves out. As any gambler knows, that's not usually how large, unchecked bets work out. They usually wind up as disasters.
I'm afraid we're headed for the great cratering. The whole financial system is a sandcastle built in the sky. And it's about to rain. The whole thing is going to crater in on itself. It's time to stop treating the bankers and their Republican (and Democratic) protectors as legitimate actors. They're the ones that have set up this calamity. It is way past time to hold them accountable instead of playing political games with them.
Follow Cenk Uygur on Twitter: www.twitter.com/TheYoungTurks
The public deficitm is PEANUTS compared to the derivative monster.
A COMMISSION SHOULD BE SET UP TO CLEAN UP THE DERIVATIVE MESS.
The FDIC helps appox. 4-5 banks that close each week. If that doesn't tell you the story I don't know what will. Check it out.
This is a typical straw man argument, whereby the author begins a discussion with a false premise, then proceeds to dismantle the false premise based on the "merits" of his own argument.
You claim that the GOP is in the pocket of Wall Street. How much did Goldman give to Obama? Of hedge fund managers what percentage of their contributions went to Democrats vs Republicans.
If there is fraud then word gets out. If you want to hire a mechanic and your neighbors warn you to avoid Pete's down the road then Pete loses business and eventually must close. Pete has every incentive to treat his customers fairly. The same is true for banks. Will fraud still happen? Of course it can never be eradicated. Even under the totalitarian boot of the Soviets fraud and corruption was rampant, so much so that their national leaders would even admit that it was a part of Soviet life.
Govt is the sole source of monopolies. There can be no monopoly without govt intervention. To say that the govt protects us from monopolies is naive. Why do we have no door to door mail service other than teh USPS? The govt prohibits it. If you want to open any number of businesses large or small you may be required to get a permit which has the effect of creating a monopoly.
The world no longer works that way, RightWingMarine, and it hasn't for a very long time.
We really were lucky. And I mean that as no disrespect to the people who are having such a hard time with money and unemployment. But the Great Crash of 2008 could have been SO much worse. If it had been allowed to run just a few weeks longer, the casinos...er...I mean banks, wouldn't have been able to cover their bets. That would have brought the domino crash of the world financial system that would have left us back in the Medieval system of currency. But as Cenk says, unless we do something, that was only previews of coming attractions.
I'm not sure. They're not tied to anything. Do they only cause trouble to the extent that they allow someone to borrow against them, creating a problem in the financial system if that guy loses the bet and defaults?
The key question is how are they actually tied to the financial system in such a way that will affect it, when roughly half (losers of each bet) default?
The answer is, either they affect the real financial system in such a way that it will be destroyed, or they are really irrelevant. Which?
What matters is our ability to grow food, produce energy and other goods, obtain clean water, breathe fresh air, and feel connected in the world. Derivatives? Pfft. Seriously, why should we worry about this stuff, when more direct and material concerns are looming, such as massive oil spills in the Gulf of Mexico or ecocide via climate change, to name just a few?
Our belief in this sick system needs to evolve to something different. I know this is sort of a simplistic dismissal on the issue, but I question how seriously I should take "derivatives" in the face of genuine social and ecological crises. "Derivatives" are fake. Clean water and a livable planet and healthy people are not.
I was going to reply to the author of this post that focusing on CDOs is wrong since the bankers would just find new ways to scam "money" (labor and assets) out of the rest of us, but now I think he has the right of it. CDOs will ruin us all.
The only solution I can see is that banks and financial institutions only be allowed only a small WHITE LIST of financial transaction, and that all transactions not specifically enumerated by the government on this white list are BANNED. Unless CDOs are reined in harshly and my white list proposal is enacted into law, I can only see a short and unhappy future of spectacular economic booms and even more spectacular economic busts for the world.
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Yes, but be warned. Due to such things as algorithmic trading, high frequency trading and dark pools you will not get the transparency you are looking for.
Derivatives are ideal for fraud, there opaqueness invites fraud, in fact, I think they have been specifically designed to permit fraud. The economic value, i.e. their contribution to the economy, is zero.
The best and safest way to get rid of this mess is by outlawing all derivatives (except forwards).
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I think you are wrong with both assumptions. Declaring them things that 'everyone knows' doesn't make them true.
Regular derivatives like what? Options, futures, etc are to a large degree used to specualte on price swings without any interest in the underlying. This is what drives prices up and introduces instability. Derivatives are completly useless in terms of contribution to the economy, the only exception to that is the futures contract, which is OTC and really is useful to hedge against price swings. Only the CDS could honestly be called insurance, because that's exactly what it is.
Second, 'free markets' are good a setting prices. Really? Unfortunately, there is no such thing as a 'free' market, because any market will always be subject to multiple constraints, such as limitation of the number of suppliers or purchasers, government regulation, etc. which lead by definition to price 'distortions'.
Also you don't make it clear why in addition to 'free markets' you would need an additional concept of 'well-functioning markets'. Obviously, in your view free markets are not automatically well-functioning markets, but why is a free market the ideal solution then?
We need honest banks, and an archetypal currency denominated in gold or silver grams to keep them honest. Banks, Wall Street or otherwise, should not be allowed to leverage money, period. Loans should be made only from savings. Prices will adjust down naturally and interest rates will float freely, rising to attract capital for future growth.
I know people think gold-backed money is hopelessly archaic (all the textbooks in our government run schools say so), but it would return purchasing power to producers and yank it away from the parasites of finance and from the war-mongering politicos who finance their misadventures with monopoly money.
(A commenter laughed at my statements a few days ago, pointing out that there were bank runs and crises galore when we were on the gold system during the 19th century. It wasn't a failure of gold or specie-backed money, however, but of the artificial and fraudulent creation of credit that exceeded the gold or specie banks held---and the failures weren't systemic but localized. Fractional-reserve lending is the culprit, a practice which the jurists of the Roman Republic understood as fraud. That understanding was relinquished during the years of the Empire, when their band of monetary extortionists, like ours, arrogantly decided how much money the empire needed to function. The hubris of monetary and political "experts" knows no bounds.)
Think about it.
From Hawaii this resolution goes to the President and Vice President of the United States, to the Speaker of the House, and to Hawaii’s Congressional Delegation. The only good thing about that is it will then be on the national radar. It would still require two thirds approval in both houses of Congress and then three quarters of all state legislatures to become law, so we are a long way from the goal line. But the roar of peasants with pitchforks is being heard in the corporate boardrooms and if Hawaii can do it, so can other state. Our biggest export before Obama was carved coconut faces.
If you borrow $1,000,000.00 you have to pay it back. Bankruptcy courts will go after everything you have to pay it back. But if you form an LLC, and it borrows $1,000,000.00, and it pays you and two other owners "salary" of 300,000.00 each and spends 100,000.00 on whatever the LLC is officially supposed to be doing ... and then the LLC defaults on its loans ... the courts can't take the money out of your pocket.
If Owner's were held accountable for their companies debts you'd see a lot less casino behavior. You gamble a lot less wildly when your own money is on the line.