NIDAN - The Economy Lie - Part 1 - Derivatives

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The financial crisis which struck the United States and the world in September and October 2008, was in fact a world derivatives panic. This panic marked the first phase of a world economic depression caused by derivatives speculation. The second phase of this depression can also be attributed in large part to derivatives, since derivatives are the main tool being used in the speculative attacks on Greece, Spain, Portugal, Italy, Ireland, and other nations, building up towards a chaotic collapse of the euro.

Derivatives can be defined as any financial paper which is based on other financial paper. In other words, they are financial instruments whose value depends upon, or is derived from the value of other financial instruments. Any kind of securitization results in the creation of derivatives. If individual mortgages are wrapped up and packaged together as a mortgage-backed security, that is a derivative. Any asset-backed security, be it based on car loans, credit card debt, or anything else, also qualifies as a derivative.

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like "toxic assets," "exotic instruments," and – most notably – "troubled assets".

The reactionary legend is that the crisis was caused by poor people, taking out subprime mortgages and then defaulting, bringing down the entire Anglo-American banking system and triggering the bailouts. Either that, or too much government spending was to blame. The truth is that the $1.5 trillion in subprime mortgages were dwarfed, by the $15 trillion US residential real estate market, to say nothing of the 1.5 thousand trillion dollars world derivatives bubble.

The subprime mortgage was bad. But the collapse of subprime would not have had anything like its actual destructive effect on the US economy, if it had not been compounded by the mass of synthetic derivatives, that were piled on top of subprime.

Thanks to the Wall Street banks, and their derivatives, the financial panic of 2008 has turned into a world economic depression of unimaginable proportions.

The unemployed and underemployed in the US alone are surely in excess of 20 million. Five to six million home foreclosures are already done or in the pipeline, throwing tens of millions of Americans out of their homes. World trade has been seriously impacted. The budgets of California, New York, Illinois, and many other states are in crisis, with massive layoffs of teachers and other state employees. An entire generation is being destroyed.

The speculative attack on Greece and the euro represents the leading edge of the second wave of the depression, which is now arriving in much the same way that the second wave of the 1930s depression was unleashed by the Vienna Kreditanstalt bankruptcy in May of 1931, about 79 years ago and just a year and a half into that depression.

All kinds of derivatives, be they exchange traded or over-the-counter, were strictly banned and outlawed in the United States between 1936 and 1982 thanks to President Franklin D. Roosevelt. In the wake of several attempts by predatory speculators to manipulate the prices of wheat and corn, during the First Great Depression, the Commodities Exchange Act of 1936 outlawed the selling of options on agricultural products. This law had the effect of blocking most derivative speculation. The very existence of derivatives today and their resulting ability to bring on a new world depression, are thus directly attributable to the dismantling of that law.

It is time to shut down the derivatives rackets. The Wall Street investment houses serve no useful social purpose whatsoever. They exist solely for the purpose of pursuing speculative profits through a process of looting and pillaging the rest of the economy.

We must also address the catastrophic effects, and obvious illegality of credit default swaps.

Credit default swaps represent bets on whether a given asset or company will go bankrupt or not. As such, they can be used as insurance against such an eventuality, or else they can be used to make money on the insolvency. CDS are therefore a form of insurance, but they are issued by counterparties who have not registered as insurance companies, and who have not met the legal and capital requirements which are necessary to function as an insurance company. It ought therefore to be clear that CDS have been totally illegal all along, and have flourished only because of an outrageous failure by state insurance regulators to enforce applicable laws against the privileged class of financiers.

Unless credit default swaps are banned now, they will be increasingly used for speculative attacks against the bonded debt of American states like California, New York, Illinois, and all the others. Before long, credit default swaps will be used by international speculators to attack the value and integrity of United States Treasury securities, threatening the country with the calamity of national bankruptcy. If the United States fails to shut down credit default swaps with timely legislation now, they will be used to help destroy the United States and human civilization in general.