Skip to comments.How To Bring The Cancerous Derivatives Market Under Control
Posted on 01/25/2012 9:35:12 AM PST by SpaceBar
On March 9, Lyndon LaRouche intervened in the economic crisis to propose a plan that is as simple and direct, as it is potentially effective in its execution: a sales or transaction tax on the turnover of ``financial derivative'' securities or financial instruments. Each time such a security or instrument is traded, he said, it should be taxed at 0.1 percent of its face value, or, as it is called in the derivatives trade, its notional principal amount.
Talk to most people about ``derivatives'' and you pretty soon discover that they have no idea what they are. Still less do they have any comprehension that the financial practices which have developed, since especially 1981-82, represent one of the most serious threats to the very existence of their country and the human species.
The growth of derivatives went past the point of no return at the end of last summer, on Sept. 16, to be precise. That was the day when the European Monetary System was wrecked, the day for which people like George Soros, and Citibank, borrowed billions of dollars to blow out the currencies of Britain and Italy. They showed that day that the speculative cancer that had been unleashed had grown beyond the point that monetary authorities could control.
That's what derivatives do. They are purely speculative highly leveraged instruments, designed to capture spreads, or pricing differences between different interest rates, currencies, or commodities.
(lengthy article continues at link)
(Excerpt) Read more at american_almanac.tripod.com ...
Only a bunch of commies would want to bring the derivatives market under control.
I trade derivatives for a living - STAY AWAY FROM MY MONEY. If I smell class warfare on Freerepublic then where do I turn? Will I be forced to descend to the level of those who criticize my way of earning a living? Will I be forced to vindictively claim that carpenters, doctors, plumbers, etc. all require greater government oversight?
Did you read the article, or just defending your livlihood of buying and selling financial instruments created out of thin air?
“Did you read the article, or just defending your livlihood of buying and selling financial instruments created out of thin air?”
Why would I waste my time reading vile hate being spewed by those who hate?
“out of thin air.”
Derivatives are obligations to do to something based on something that happens. It is a contract. Are you opposed to contracts like many commies?
The problem with derivatives is not some guy trading Vanilla calls,its the over the counter deals which are very often naked. An un-hedged position is good and profitable if your bet is working out, however if it is not working out you might destroy your company, and your counter-party. The only way to stop that is to make sure that you have equity to cover all your liabilities on all your positions, NO MATTER where the underling asset goes. The only way to enforce that is through government regulation by SEC. Obviously this regulation should only kick in when the size of deals is large enough to have adverse effect on the US Economy, some small time hedge fund with 50Mil under management should not be bothered.
This is where capitalism fails: Financial Firms don’t care about risk management. Cause what’s the worst that can happen? If they are large enough they get bailed-out,if not it has catastrophic effect on the whole World economy. A small firm if it goes bankrupt - big deal the manager still gets his fees and bonuses. Risk management cost money,more risk you take more money potentially you can make. Thus you need an outside party to control the catastrophic risk for large firms and for economy as a whole.
So because Bush and Obama believe in bailouts my industry needs greater regulation? Whatever. You are using socialism as an excuse for more socialism. We know where that ends up.
So you actually believe the bailouts “saved” the global economy? That doesn’t sound like Freeper material to me.
And so what if an unhedged position destroys your company and your counterparty? Who cares? I frankly don’t care that businesses fail everyday. If you want a business to not fail then look to North Korea. Businesses never fail there.
“Are you opposed to contracts...? “
“Actually no. I understand them, including the notions of consideration by both parties, collateral, remedies for breach of, and the legality of the terms of said contract. It’s an extremely valuable legal instrument that has benefited the western world for centuries. However they were never meant to be the tool of trade for degenerate gamblers.”
I am livid. Degenerate gamblers? It is the speculator that PREVENTS the shortage of things. Without the speculator the hedger might have no counterparty. Look how shortages happened in the Soviet Union - 20 million people starved to death around 90 years ago due to grain shortages. How many millions starved in North Korea in the past 20 years due to food shortages. In capitalist societies the speculator (and I am a PROUD speculator) bids up the price on things when he thinks there will be a shortage of them. This allows people to make substitutions and begin to ration before it is too late. The price signal allows people to react.
The speculator makes a lot of money and you don’t like it. Are you experiencing envy?
That’s all good,when the failure of the given business only affects that business and damage doesn’t spread.
lets say all banks in US got pretty mortgage insurance from AIG, and now AIG is bankrupt — good they deserve it! Now every single bank is not-solvent, and has to be taken over by FDIC (yes it is extreme example) now do you think FDIC has ability to support every single bank in US at the same time,I don’t think so. Again a financial institution,is not just itself it is all counter parties,and counter-parties of those people,etc.. And the chain never ends if one big guy fails,it pulls down everybody with it, all Firms, ,clients,and employees. Yes its an extremely fragile and interconnected system,a very dangerous system, which doesn’t happen in any other industry it seems.
And no regulation is not communism of socialism unless you are Ron Paul supporter, financial institutions are regulated already FDIC,SEC,FTC,etc.. But non of those regulations really address catastrophic risk.
If every position is hedged,then if company like AIG goes broke you can liquidate its assets and pay to their counter-parties,without having GOV Bailout. I think that is the most capitalistic way to go,personal responsibility.
Would you care if an unhedged position destroyed your country?
“The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
“The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.”
You like hyperbole and FDIC is socialism.
Do wild bears defecate in the forest?
Your industry has proven itself to be incapable of self-regulation. Strict limitations on leverage should be enforced. That's not socialism, that's just common sense.
And I don’t mean hedged with your awesome wiz-bang trading algorithms. It must be hedged with cash equivalents (T-Bills )for the maximum exposure possible. Yes its very expensive to keep that much cash on hand,but tough luck,its still better then waiting for Tax payer bailout — that’s capitalism.
You do not have to regulate derivatives, you just need to make it illegal for our government to bail out the companies that sell them.
How is the FDIC socialism? Member banks pay a fee in return for the FDIC guaranteeing their depositors' funds (up to $250K). Banks are not required to become FDIC member banks.
From those fees paid by banks, the FDIC maintains a Deposit Insurance Fund and pays its operating expenses. Not one taxpayer dollar is expended by the FDIC. It is an independent agency.
How is that socialism?
Sure FDIC is socialism! Like any insurance your Home Owners insurance its also socialism, if you have a firm,it will give you free money, that’s evil. Every bank client should do a financial audit of any bank he deposits his money to, I mean everybody is holding a CPA right? If you think a private company can do a service of FDIC, I say sure right after you can find private insurance company to cover you for risk from Acts of War or Nuclear Disaster. Good luck, private industry really suck at covering for massive catastrophic risk.