It's the Derivatives, Stupid

Free market fundamentalists say the real problem with our financial sector is that they are over-regulated. If we just let the banks regulate themselves that we wouldn't have any problems. Rush Limbaugh says Goldman Sachs is the victim. The government caused the problems with all of their rules and regulations.

Interesting. Would Rush go to a Las Vegas casino that wasn't regulated by the government? Would any of you? Would you trust that the casinos will regulate themselves? Don't worry, they won't fix the roulette table or cheat on any of the games because of the invisible hand of the free market. There's an invisible hand alright, it's the one reaching into your pocket.

If the casinos set their own rules and the government never checked in on them to see if they were cheating, only absolute suckers of the world would go to those casinos. Unfortunately, that's exactly the situation we have right now in our financial sector.

First, everyone understands regular derivatives that hedge your own assets or securities have a place in the financial world. They're basically insurance and have been around a long time. Second, everyone understands that free markets are very good at certain things like setting prices in well-functioning markets. But we also understand that the government has a role, such as barring monopolies and making sure our food supply is safe. At least, most rational people understand that.

The situation we have now in our top banks though is not normal market conditions with traditional derivatives. Most of the current staple of complex derivatives have no underlying assets. That means it's just one guy betting against another in a deal where neither one of them has a stake in the original transaction. Some of these are called naked credit default swaps. And they are in fact naked gambling. I don't know anyone who disputes that.

The derivatives market is now valued at $605 trillion. Except no one really quite knows the real number because most of these transactions are done in secret. So, this is beyond a shadow of a doubt the largest casino in the history of the world. Except the government doesn't check in on it all and most of the bets are done behind closed doors. That is a recipe for a disaster of epic proportions.

We have no idea if these banks have anywhere near the collateral they need to pay off any of these bets if they are on the losing end of the deal. Even Warren Buffett's Berkshire Hathaway is in a panic over collateral on their $63 billion dollars worth of derivatives. If Berkshire doesn't have the collateral, who does? My guess is absolutely no one.

If you force the banks to list their derivatives bets, the entire market will be exposed as a dangerous fraud with not nearly enough capital to sustain the magnitude of the bets. If you don't list the bets in public, then they will only get larger and blow up on us again, causing another worldwide meltdown. This is an economic catastrophe waiting to happen.

And today the Republicans blocked financial reform debate for a third time. The GOP is a wholly owned subsidiary of corporate America. We have to stop treating them as honest actors. The Democrats usually do a hideous job of calling them out on this, partly because they're afraid that they will also be exposed as corporate shills.

The media is wholly negligent in covering this issue and politics in general. When is the last time you heard on CNN that a politician was voting based on his corporate contributions? The politicians are largely driven by lobbyist money and that factor is almost never mentioned on television. Our political press is a joke. No wonder we have no idea the magnitude of the problem and what's causing it.

So, let me break it down real simple for you - it's the derivatives, stupid. The entire world GDP is a little over $60 trillion. The secret, unregulated casino market of derivatives is worth $605 trillion. Now, who thinks that makes sense? The banks are running a casino that is ten times the size of the world economy - and it is completely unchecked.

If you're paying a lick of attention, you'll see that spells economic doom. There is an iceberg straight ahead. We're headed right for it, as some idiots continue to argue that we should let the banks regulate themselves. Trust them; their secret bets will magically work themselves out. As any gambler knows, that's not usually how large, unchecked bets work out. They usually wind up as disasters.

I'm afraid we're headed for the great cratering. The whole financial system is a sandcastle built in the sky. And it's about to rain. The whole thing is going to crater in on itself. It's time to stop treating the bankers and their Republican (and Democratic) protectors as legitimate actors. They're the ones that have set up this calamity. It is way past time to hold them accountable instead of playing political games with them.