Derivatives and the Coming Bust
There is a serious and gravely overlooked disaster staring us in the face, one that is part of the current financial crisis but has the potential to completely destroy America’s and the world’s economy, for good. This disaster is the Derivatives Market.
The Republican Congress of the 90s (with the help of Clinton) destroyed the safeguards that prevent our banks from becoming casinos and betting on anything and everything. Today, many of our financial institutions own lots and lots of derivatives that they will soon find to be worthless.
What are derivatives? In simple terms, they’re bets, multi-billion-dollar-bets. Remember how the banks bundled up the risky mortgages, into securities, thereby masking the true risk of the investment. Derivatives as when investors bet that a particular stock or security or commodity would go up or go down. These derivatives were “derived” from the value of the original investment. Then, the next “master of the universe” would bundle these derivatives again, adding more bets. As you can see, $100 worth of investment can be resold endless times by bundling and by creating derivatives.
If this sounds like a Ponzi scheme to you, you’re right on the money. It’s a scam, but it’s bundled so the investors don’t really know what they’re getting.
You may be wondering how pervasive the derivatives market really is. If you guess it must be pretty darned big in order to be bigger than our existing crisis. then you’d be right. The total investment in all the derivatives is more than 100 times greater than all the Gross Domestic Product on the entire planet. When they go down in flames, there won’t be enough money in the world to bail them out.
Until we see how other countries deal with this, it’s impossible to say just how bad things will get. Common sense, however, indicates that this could be the event that causes the entire world to re-invent our financial systems. It could be that the only way we can survive this coming crash is to let all the investors that bought the bad derivatives jump out of their windows and start up the investment systems from scratch.
This could be a good change in the long run but it is not a good time to be getting this news and it will be many years of bad times, fighting with the Always-Been-Wrong Republican Party’s obstruction getting this fixed.