September 21, 2008

Remember who we are up against

"'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."

"1. Quoted in James Wesley, "Derivatives – The Mystery Man Who’ll Break the Global Bank at Monte Carlo," SurvivalBlog.com (September 2006).

2. "Killer Derivatives, Zombie CDOs and Basel Too?", Institutional Risk Analytics (August 14, 2007).

3. Kevin DeMeritt, "$1.14 Quadrillion in Derivatives – What Goes Up . . . ," Gold-Eagle.com (June 16, 2008)"

(I wouldn't usually quote from something like Ellen Brown's blog, "The Web of Debt", which may be on the wilder edges og the blogosphere, but in this particular case both the argument and figures in the quote seem pretty sound and worth remembering.)


Posted by richard at September 21, 2008 4:52 PM