Derivatives are essentially bets, but they're
called "derivatives" because they're derived from something else. So you don't actually own the assets, you're
betting on the assets. For example, if
you went to the racetrack and you bet on the horses, you would not own the
horses, but you would just be betting on who is going to win. So derivatives are like that. You can bet on whether interest rates are
going to go up or down -- I mean, theoretically, you're hedging your bet. It's what farmers do, where they would sell
their corn early, betting that the price will be a certain price; and whoever
buys the futures for the corn is betting that the price will actually be better
than that when the corn comes to market, and that they'll make a profit. So they're both betting on the future: one
betting one way, and one betting the other way.
So you have this gigantic derivatives market now
that's built up, that's way bigger than the GDP of the world. In fact, it's about -- well, it depends on who
you talk to, but according to the BIS itself (which has fairly reliable
numbers), it's over 600 trillion dollars, which is -- wait. 60 Trillion [dollars] is the GDP of the
entire world, so 600 trillion is ten times the GDP of the world.
But some people say it's up to two or three quadrillion, because they're
all just numbers. You don't need to own
anything, and therefore you can have bets, upon bets, upon bets, and they're
all counted in the figures.
So those outrageous bets are being commingled with
JP Morgan's deposit share arms now, and Bank of America's depository arms. Those are the two biggest derivatives
players. They have, respectively, 79
trillion and 75 trillion [dollars] in derivatives that are mixed with their 1
trillion in deposits. So if they go
bust, the deposits are going to be sucked into that for the derivatives losses
- as we saw with MF Global, for example.
So that's more than a definition, sorry! (laughs)
Rob Kall: No, that's
good, that's good. There are some people
who say that the solution is to just ban derivatives and eliminate them from
the world economy. Is that
possible? Would that work? And what would the effect of that be?
Ellen Brown: Up until the nineties - derivatives were
considered an illegal form of gambling until they were legalized, so you could
certainly do that again. The problem is
unwinding them. The fear factor is that
when you start unwinding them, because all these derivatives players have
placed their bets both ways. They tend
to hedge their bets, you know, like Goldman Sachs will do it. So if they lose one bet, then they can't pay
off the other bet - and so [the fear is] the whole thing is this great house of
cards, and that it'll all go down and take the economy with it.
But we know that's not actually true, because
Iceland did it, for example, and it worked out perfectly well for them. They just refused to bail out their
banks. Even when Lehman Brothers went
down, which precipitated the banking crisis of 2008, they settled up on their
derivatives claims and a couple of years
ago. It can all be netted
out. There will be a little time of
trauma, but it could work, I think.
Rob Kall: If it was
done, how would that change things?
Ellen Brown: Well, they
should get rid of the derivatives where there's not a sale at the end. You need to protect the farmers, of course,
so if you have a real product to sell, then that type of derivative should
remain, or that type of future sale should remain. What should be eliminated is where they are
just betting on the market. You know,
bets on bets. There are these synthetic
bets where you don't own anything, and there''s no actual sale at the end of
it, even. You're just betting on what
the price is going to be. They could
eliminate all that, and it would be for the good, once you got it done. There might be a mess while you were breaking
some eggs, but in the end /
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