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Re: SC78

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October 09, 2008 02:32PM
There is an economic Deathstar that appears to very realisticaly hold the potential to destroy the world's financial markets if its cosmicly sized pyramid scheme collapses. It should collapse, and should be outlawed from ever being set up again since it only represents parasitic greed of monumental proportions upon the general people of this world who actual produce things of real wealth and value. What the conditions in our world will be upon its demise? We can only guess at the mayhem that will be precipitated :


Economic Globlization and Speculation Coming Home to Roost

With the current economic crisis which seems to be spreading across the world we are dealing with far more than a “subprime” crisis, or an attempt to “quarantine “toxic debt.” There is a much bigger avalanche waiting to come tumbling down. Namely the derivatives market now estimated to be over $1 quadrillion (that is 1,000 trillion) in global derivatives holdings. That makes the current $700 billion bailout look like less than a drop in a very large bucket........

............What the Hell are “Derivatives?”

Wikipedia defines derivatives:

Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options, and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs. Unregulated Credit derivatives have become an increasingly large part of the derivative market.

If you don’t feel particularly enlightened, you are not alone. One off the best articles I have found on the current derivative situation was written by Ellen Brown and published at Global Research. In “It’s the Derivatives, Stupid! Why Fannie, Freddie, AIG had to be Bailed Out,” Brown states:

The Anatomy of a Bubble

Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.”1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2

Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars - that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money - free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.

Now the picture becomes a bit clearer … and more dire. John Maggs, writing “Derivatives: The Other Shoe Waiting To Drop” for the National Journal quotes Warren Buffett:

Billionaire investor Warren Buffett has been calling these derivatives a “mega-catastrophe” waiting to happen since the 1990s, when they began to proliferate. Buffett warned in May 2007 that a crisis in the derivatives market wasn’t just a possibility–it was an eventuality..................

................. What happens if the over the top holding of derivatives flips the iceberg upside down? It is a frightening thought. It is particularly frightening since the trend seems to be that the treasury (and us the tax payers) are going to stand surety ( be on the hook for ) for “arcane financial instruments” which have no real value.

So the U.S. is pushing “bail, bail, bail” for an economic boat which essentially has no hull. There is a very real problem here that has governments scrambling. Historically financial recovery strategies have been dealt with on a national basis (often reaching out to exploit “undeveloped nations”) to achieve economic recovery. However, there is now no real national boundaries to the financial markets. Everybody’s ass is blowing in the wind to one extent or the other, and the markets have been given virtually total control. While the US and European nations seem to be nationalizing the losses to one extent or another, no one seems to have any ideas of how to put the unruly borderless market horse back in the paddock - much less in the barn.

I think it is very important to not be lead astray by the claims of “corruption and greed.” While it is certainly true that these unflattering character traits were (and are) present, the systems have been restructured to reward avarice and illegal activity. Global investment and finance has become the biggest (and most rewarding) gambling venture ever known. It has been structured as a “money machine” that utilizes the labor and resources of the planet to extract every drop of wealth, and then protects the gamblers so that the big ones win regardless of whether those markets go up … or down.

The current insane situation we are in, and the reality of over the (unimaginable) sum of a QUADRILLION dollars hanging over us with nothing but air supporting it is more than a daunting prospect. But this was an environment that was created and facilitated by “decision makers” in and out of governments across the planet. Now it is has gotten so big and so precarious that its monstrous head is coming into the view of “the people.”

There hangs the question of what to do about it. My gut response is to slam the door. Put a wall around the real economies and the people in them, and declare derivatives and other “arcane” instruments and markets illegal. Shut them down and keep them shut down. Some how, some way, economies have to get back to real value. That value resides in the people, not in the Casino Royale of financial wizardry...................

I recommend highly that you read the rest of this superb article.


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