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1.5 Quadrillion Dollar Derivatives Bubble at the Heart of Financial Crisis.

  • The current estimated US$14 Trillion of bailout, guarantees, loans… by the US government will not revive the economy. It is simply trying to paper over the $1.5 Quadrillion (1000 Trillion) derivatives problem. No amount of money can paper over this financial black hole. The derivatives market is a financial casino that the banksters have been running and it is totally out of control.
     
  • ACTIndependent.org statement to the G20 :
     
    On the eve of the long-awaited London conference of the G-20 nations, we are rapidly descending into the chaos of a Second World Economic Depression of catastrophic proportions.  In the year since the collapse of Bear Stearns, we have moved toward the disintegration of the entire globalized world financial system, based on the residual status of the US dollar as a reserve currency, and expressed through the banking hegemony of London, New York, and the US-UK controlled international lending institutions like the International Monetary fund and the World Bank.  This is a breakdown crisis of world civilization, prepared over decades by the folly of deindustrialization and the illusions of a postindustrial society, ….. If current policies are maintained, we face the acute danger of a terminal dollar disintegration and world hyperinflation. 
     
    The G-20 leaders are must deliberate a new set of policies capable of leading humanity out of the current crisis.  We must first identify the immediate cause which has detonated the present unprecedented turbulence. That cause is unquestionably the $1.5 quadrillion derivatives bubble. Derivatives have provoked the downfall of Bear Stearns, Countrywide, Northern Rock, Lehman Brothers, AIG, Merrill Lynch, and Wachovia, and most other institutions which have succumbed.  Derivatives have made J.P. Morgan Chase, Bank of America, Citibank, Wells Fargo, Bank of New York Mellon, Deutsche Bank, Société Générale, Barclays, RBS, and money center banks of the world into Zombie Banks. 
     
    Derivatives are financial instruments based on other financial instruments– paper based on paper.  Derivatives are one giant step away from the world of production and consumption, plant and equipment, wages and employment in the production of tangible physical wealth or hard commodities. In the present hysteria of the globalized financial oligarchy, the very term of “derivative” has become taboo: commentators prefer to speak of toxic assets, complex securities, exotic instruments, and counterparty arrangements. At the time of the Bear Stearns bankruptcy, Bernanke warned against “chaotic unwinding.” All of these code words are signals that derivatives are being talked about.
     
    Derivatives include such exchange traded speculative instruments as options and futures; beyond these are the over-the-counter derivatives, structured notes, and designer derivatives. Derivatives include the credit default swapsso prominent in the fall of AIG, collateralized debt obligations, structured investment vehicles, asset-backed securities, mortgage backed securities, auction rate securities, and a myriad of other toxic variations.  These derivatives, in turn, are pyramided one on top of the other, thus creating a house of cards reaching into interplanetary space. 
     
    As long as this huge mass of kited derivatives was experiencing positive cash flow and positive leverage, the profits generated at the apex of the pyramid were astronomical.  But disturbances at the base of the pyramid turned the cash flow and exponential leverage negative, and the losses at the top of the pyramid became immense and uncontrollable. By 2005-6, the disturbances were visible in the form of a looming crisis of the automobile sector, plus the slowing of the housing bubble cynically and deliberately created by the Federal Reserve in the wake of the collapse of the dot com bubble, the third world debt bubble. and the other asset bubbles favored by Greenspan.
     
    Financiers are trying to blame the current depression on poor people who acquired properties with the help of subprime mortgages, and then defaulted, thus – it is alleged — bringing down the entire world banking system!  This is a fantastic and reactionary myth. The cause of the depression is derivatives, and this means that the perpetrators to be held responsible are not poor mortgage holders, but rather globalized investment bankers and hedge fund operators, the derivatives merchants.
     
    We are now in the throes of a world wide derivatives panic.  This panic has been gathering momentum for at least a year, since the fall of Bear Stearns.  There is no power on earth which can prevent this panic from destroying most of the current mass of toxic derivatives.  It is however possible that the ongoing attempts to bail out, shore up, and otherwise preserve the deadly mass of derivatives will destroy human civilization as we have known it.  We must choose between the continued existence of derivatives speculation on the one hand, and the survival of human society worldwide on the other. If this be crude populism, make the most of it. 

       
  • Unless this derivatives problem is resolved, there is no way the world economy is not headed towards a massive 7-10 years Great Depression. ACTIndependent.org again :
     
    FREEZE DERIVATIVES FOR THE DURATION OF THE CRISIS
    The G-20 must remove the crushing mass of derivatives which is now dragging down the world economy. Derivatives must be banned going forward, but this by itself will not be sufficient. The ultimate goal must be to wipe out and neutralize the existing mass of $1.5 quadrillion in notional values of toxic derivative instruments. Some governments may be able simply to decree that derivatives be shredded, deleted, and otherwise liquidated, and they should do so at once.  Virtually all governments should be able to use their emergency economic powers to freeze derivatives and set them aside for at least five years or for the duration of the crisis, whichever lasts longer.  Legal issues can be settled over the coming decades in the courts. Humanity is in agony, and we must act against derivatives now. Going forward, we must ban the paper pyramids of derivatives in the same way that the Public Utility Holding Company Act of 1935 banned the pyramiding of holding companies.
     
  • American Investment banks and the Federal Reserve are at the heart of this problem. These banksters do not want to face reality and want to perpetuate this derivatives market forever. They will not succeed. The US$14 trillion committed is equivalent to the entire USA GDP output. Why isn’t the economy turning around? With US$14 T you can pay all the outstanding mortgage loan amount, all the credit card debts and have some left over. Where did all these money disappear to ? Stop blaming Main Street sub prime mortgages for this problem. They are not the real cause at the heart of the problem.
     
  • If this problem is not resolved, look at what happened during the 1st Great Depression. Similar unresolved issue led to World War 2.
     
    Derivatives pose the question of fictitious capital — financial instruments created outside of the realm of production, and which destroy production. In 1931-2, fictitious capital appeared as tens of billions of dollars of reparations imposed on Germany, plus the war debts owed by Britain and France to the United States.  These debts strangled world production and world trade. Bankers and statesmen tried desperately to maintain these debt structures. But US President Herbert Hoover proposed the Hoover Moratorium of 1931-1932, a temporary freeze on all these payments.
     
    The Lausanne Conference of June 1932 was the last chance to wipe out the debt permanently. But the Lausanne Conference failed to act decisively, and passed the buck. By the end of 1932, there was near-universal default on reparations and war debts anyway. And by January 1933, Hitler had seized power. We urge the London G-20 to defend world civilization against derivatives. It is time to lift the crushing weight of derivatives from the backs of humanity before the world economy and the major nations collapse into irreversible chaos and war, as seen during the 1930s.
     

end

March 30, 2009 - Posted by | Economics, GeoPolitics | , , , ,

5 Comments

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      Comment by mosesman | April 9, 2009

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  3. […] So from my reading Derivatives are leveraged risk via contract for profit. By themselves they have no value but represent a future scenario. The total "value" of the contracts is now $1.5 quadrillion. […]

    Pingback by Derivatives for the rest of us « Revolution Not dot com | November 3, 2009

  4. […] never seen any danger coming either; their exotic instruments are today responsible for more than a quadrillion dollars in notional value. Soon, we’ll read how fictive this value was since global indebtedness is […]

    Pingback by Economic 2012 In The Cards | Debt Relief Articles | Loan Articles | September 10, 2010


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