Unfortunately, the derivatives market was based upon reality and involved peoples' mortgages, savings and retirement accounts. As with all gambling, the house won most of the hands and the sources upon which these high stakes gamblers bet, lost and shared their losses, thus creating the untenable and immoral economic downturn which began in 2006, were mostly so called subprime mortgages. This disaster was inherited by President Obama's administration.
Warren Buffet, the wealthiest person in the entire world, reached that position not by leading a Socialist revolution, but by using the tools of capitalism. In Buffet's case, the tools were honest, indeed, legal economic tools.
Thus, Buffet's 2002 exposure of the greed that was taking hold inside American corporations, especially financial institutions, and his prediction of economic catastrophe, should have been heeded, but was not. This greed manifested itself through derivatives, instruments more risky and less certain than those used by t-shirted men with unshaven faces who show up at the horse track or the casino day in and day out.
The following is a summation of what Buffet, who even the letter writer has to admit should know something about economics, had to say in 2002, six years before Barack Obama was elected president of The United States:
"I view derivatives as time bombs, both for the parties that deal in them and the economic system. Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values.
"" before a contract is settled, the counter parties record profits and losses -- often huge in amount -- in their current earnings statements without so much as a penny changing hands. Reported earnings on derivatives are often wildly overstated. That's because today's earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
""the parties to derivatives" have enormous incentives to cheat in accounting for them. "often there is no real market". This substitution can bring on large-scale mischief. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
"Almost invariably, they (derivatives) have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
"Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. "It all becomes a spiral that can lead to a corporate meltdown.
"Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counter-parties tend to build up over time. A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. However under certain circumstances, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z.
"In banking, the recognition of a "linkage" problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain."
How prolific was this risky trading of derivatives? The worth of the derivatives now out, the bets that have been made against such resources as mortgages, is now $1.4 quadrillion. That's right, quadrillion dollars. The GDP of the entire planet is $45 trillion. There are more derivative "bets" out right now than there is money to pay them off, should they come due. Exactly how is Barack Obama to blame for this madness which began in 2006?
As you can see, President Obama has not killed any goose, capitalist or otherwise.
You scare me because you have begun to use 'extortion' tactics against certain banks and corporations.
As you can plainly see from the previous response, those who hold banks and corporations hostage are the CEOs and top executives of those banks and corporations.
In 1980, the median pay for CEOs of multinational corporations was 42 times that of the workers who made those companies tick, who actually produced the wealth.
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10
Michael Bonanno is an associate editor for OpEdNews.
He is also a published poet, essayist and musician who lives in the San Francisco Bay Area.
Bonanno is a political progressive, not a Democratic Party apologist. He believes it's (more...)
