According to various estimates, the global derivatives market is valued at $1.2 quadrillion. Nobody knows the exact value but this is an estimate of how the big market is. This figure is greater than the entire world’s GDP, 20 times the GDP to be exact, and should not be taken lightly.
Why? Simply because of the fact that it is highly unregulated. It is so unregulated that the Congress has declared it illegal to regulate it.
Despite the fact that the Commodity Futures Trading Commission has advocated for greater regulation and Warren Buffett has called derivatives “financial weapons of mass destruction,” it is unbelievable that such a huge amount of money still remains unregulated. Most people can’t imagine $1.2 quadrillion dollars. If you take this money and cover the entire surface of the Earth, you would have to do it one and a half times.
What does that mean? It means that this huge, highly unregulated market poses a huge risk especially since only four banks hold 95.9 percent of the derivatives in the US.
When we say $1.2 quadrillion, we do not mean $1.2 quadrillion in actual cash. This is the notional value – bets on the value of something else – stock, bond, security or interest rate. However, since the market is so immense and the amounts that are to be paid are so astronomical, it does not take a genius to figure out that this could have significant implications on the financial system.
Bets can be won or lost. Bets can create bankruptcies and they can cause organizations and institutions to fail. This could in effect disrupt the economy since the effects of bankruptcies eventually trickle down and affect a large number of people. Moreover, in this digital age, a large number of financial transactions take place online. It just takes a mouse click to transfer the liabilities of these bets all over the world. The financial institutions that are involved in this market have affiliates around the globe and they can transfer the risk of the derivatives from one affiliate to another quite easily.
So, if the derivatives market collapses, that would mean governments around the world would collapse. That would in effect mean that the monetary system would collapse. But is this stopping the big players from continuing on this path? No. They seem to be going on with their reckless derivatives trading with no worries about the potential downfall of the entire global financial system if this market collapses. They are doing so because they know that if they lose money on these bets, the federal government will swoop in and save the day by bailing them out. The mentality of the key financial players involved in the derivatives game is simply this: “heads I win, tails you lose.”
The common man does not completely understand how derivatives work and that is precisely why there is no outrage over the immense risk associated with it. The big players, including JPMorgan Chase, Citibank, Goldman Sachs, Bank of America and Morgan Stanley, have trillions of dollars in exposure to derivatives. These players have made the Wall Street into their very own casino where they place bets, win big and have a perfectly sound back-up plan with the expected bail-out.
The bottom line is that unlike stocks and bonds, these derivatives represent no tangible investment. They are wagers – that will happen sometime in the future. A derivative has no intrinsic value and no regulatory control. When this invisible investment collapses, so will the dollar. That is when the common man will suffer and the pain of this collapse will be felt by an extraordinary number of people.
The big banks will be the ones initiating the next financial crisis. They will be the one triggering the collapse of the dollar. The derivatives system will fall and the so will the financial system. This $1 quadrillion is related to interest rates. A spike in the interest rates could potentially set off this crisis. This could eventually translate into massive bankruptcies and could destroy the dollar.
As David Stockman, former Reagan budget director and bestselling author of “The Great Deformation,” points out, “break up the big banks. If they’re too big to fail they’re too big to exist….we need desperately to get this massive, overgrown, bloated, dangerous banking system under control.”
It might be difficult to envision the collapse of the “too big to fail banks” but the reality is that if the derivatives market collapse, these banks will crash and burn and so will the entire U.S. economy.
The logical measure should have been to stop these banks from becoming so big and to regulate them before they make reckless bets worth trillions and trillions of dollars. However, this is now done. The thing to worry about more is that policy makers are doing nothing about it. They are just letting it happen and that is why this derivatives market has now become like cancer for the economy.
According to the Comptroller of the Currency, “four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are.”
The banks dominate the derivatives market and they are doing as they please with permission from the government. “The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.”
If the signs are not recognized and if measures are not taken, the derivatives market will collapse. The big banks will fail and they will still not be the ones to lose. It will be the ordinary man who will lose. It will be the dollar that will collapse. The Feds will bail out the big players; the tax-payer will suffer and it will be this money that will once again be used to save “the big guns.”
Samna Ghani is the Regional Editor at Healthmanagement.org and also works as a freelance creative writer for Metroland Digital. She is the co-founder and active member of the Mississauga Writers Group. She has published several books which are available on Amazon.
This simply leaves me speechless.
What if China stops buying derivative-backed dollars?
Yea, regulation as worked so well in the past. When are people going to learn.