The Armageddon Looting Machine: The Looming Mass Destruction From Derivatives

[marmar]

The Armageddon Looting Machine: The Looming Mass Destruction From Derivatives

Wednesday, 18 September 2013 09:28
By Ellen Brown, Web of Debt Blog | News Analysis


Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

Banks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding. But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts? ........................(more)

The complete piece is at: http://truth-out.org/news/item/18907-the-armageddon-looting-machine-the-looming-mass-destruction-from-derivatives

[Warpy]

1. Nice to know I'm not the only Cassandra out there

who realizes just how fragile the economy has gotten.

When the derivatives casino closes, the crash will be astonishingly fast. It will be a repeat of 1929, when people said money disappeared overnight, leaving them without pay, then without jobs, without housing, without food they couldn't barter for.

All it's going to take is a very few big hedge fund boys getting frightened and getting out. The masses of money they control will cause a cascade that will likely be over in a day or two, to be accompanied by money being pulled out of everything and used to try to shore up the system.

Most new money dies broke. That will be the pattern in our own Republican Gilded Age, too. New money loves the shakiest of investments generating the highest return, so they'll go first.

Unfortunately, they're going to take the rest of us with them down the tubes as the stock market crashes, banks try to grab our deposits, and the whole system seizes up.

[upi402]

2. So... this is noteworty!

"value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined. "

That's gonna leave a mark.

[xchrom]

3. du rec.