What is the real value of the derivative market? It would be helpful to know that given the reliance of our banking and financial services industry on these financial phantoms. More importantly, for our current circumstance, what happens when enough people realize that there cannot be a value commensurate to the amount claimed?
This teetering derivative market can't be bailed out. There simply isn't enough money. But our rulers think that the banks, insurance companies and stock brokerages heavily indebted and riddled with derivatives can be saved. As Ellen Brown pointed out last Thursday, save them and you stop the full exposure of the derivatives market. You avoid the risk of people finding out that their money and investments are being held by institutions willing to invest in financial products that are, at the least, highly speculative and, at the worst, pure vaporware.
The current risk was triggered by the forgotten assumptions in the home mortgage derivatives market like recessions. Here's what's next. "The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy." Daniel R. Amerman, Sept.17, 2008
Is it any wonder that we're faced with an economic crisis, one that encompasses the entire economic system?
The Paulson Secretariat
The White House has selected Secretary of the Treasury Henry Paulson to lead an economic "Charge of the Lite Brigade" to prevent a total economic meltdown. A version of the administration's rescue package is available online. What's missing? There is no requirement for "the bosses" to restrain their behavior, take a pay cut, or suffer any consequences. It might tarnish their self esteem.
But the real treat is the unfettered authority of the U.S. Secretary of the Treasury, Henry Paulson, to obligate citizen debt in order to rescue incompetent banks, brokerages, and other failed institutions. Citizens will pay the bill but have no influence on Paulsen's decisions. Here are two revealing provisions from Bush-Cheney White House proposed legislation:
"Sec. 2 (a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
"Sec. 8 Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." (Emphasis mine) White House bill,
So here's the plan in summary. You bail out those companies that caused the current crisis based on what one guy wants to do. You don't allow any review of the process of spending $700 billion. And, you let the management and key staff of these companies stay in place to do it all over again.
Tinkering with the bill to provide oversight, input, monitoring misses the point. The bailout is the wrong approach. To begin with, oversight has failed again and again in the financial markets. More importantly, it ignores the next crisis, credit default swaps, and rewards the meltdown perpetrators. Nobody tells the truth about this being the tip of the iceberg. Nobody faces any negative consequences. Most everybody stays in place.
How about somebody in authority coming clean?
When is someone in authority going to tell the truth, lay out the facts, and take responsibility for this mess? Never, unless we make that happen. The mechanisms readied for approval will be sold much like the Patriot Act; steamrolled due to times of crisis. Those who speak out against another element of tyranny put in place will be ridiculed. Protestors will face the newly outfitted local law enforcement anti terrorism units who are more than willing to arrest anyone who disagrees with the administration, even in heavily Democratic cities like Denver, Minneapolis, and St. Paul.
The perpetrators can position all day long, taking advantage of the citizens through a quiescent White House, Congress, and judiciary.
But the truth will emerge - the country is broke and not because we don't work hard enough, make good products, and provide quality services. We're broke because the greediest people in the world couldn't contain their greed and there was nobody watching them who wasn't benefiting. Now the watchers are desperately trying to make it all go away.
There needs to be an accounting and a correction - and not by the usual suspects.
Here's one way to start with derivatives crisis in major institutions:
