Derivatives, Or: How The Money Power Created The Greatest Depression
Left: Robert Rubin, Alan Greenspan and Larry Summers, three of the main architects of the derivative induced Greatest Depression. As usual, the Ministry of Truth portrays them as those who prevented collapse.
Depressions and the boom/bust cycle are wholly artificial phenomena. In earlier days, Bankers created deflations simply by calling in loans. Nowadays things are a little more complicated, but crashing the money supply is still the main thing. Derivatives are today’s preferred method.
Let us first reestablish that recessions and depressions are caused by deflation. Here’s the graph showing the money supplyover the last few years, courtesy of Shadowstats:
Let us analyze a little what this graph shows. M3 is the main issue here. This is because it is the widest definition of the money supply, including long term deposits and several other forms of liquidity, including some derivatives. M3 is most telling about what is happening in the shadow banking system.
In the first place, M3 is first shown in red, then in blue. This is because Greenspan ended Fed reporting of M3 in 2006. An unbelievable scandal, off handedly done away with as a cost cutting measure.
However, we can clearly see the malicious intent here, because Greenspan was just hiding what he knew what was already starting: a massive inflation, followed by a legendary crash in M3.
As said, M3 is the widest definition of money and directly related to this is that the main deflation after 2008 happened in the shadow banking sector, non-banking lenders, like hedgefunds. It was the implosion of the derivatives that caused M3 to tank in the way it did.
In 2008, we see that M1 starts to peak when M3 crashes: this is the Fed printing money: they were buying up busted derivatives, in effect replacing derivatives with ‘real’ (freshly printed) dollars and bailing out the busted loansharks.
This is also where the rumor of hyperinflation stems from: the Austrians were only looking at M1, endlessly showing the peaking balance sheet of the Fed (M1).
Austrian Economics in general of course is always fearmongering about hyperinflation while promoting deflation. As a result, many reasonable people these days will say, ‘well, declining prices you know….’. But deflation means money is becoming worth more and this is nice for those who have a lot of it: the ultra rich in particular. During deflation wages decline too and this is not so good for those working for a living, being most of us. Much worse: debts become worth more in real terms, which is obviously disastrous with everybody drowning in debt.
And the deflation is simply the reason the economy is in shambles. The contracting money supply causes a collapse of demand in the economy.
In this particular instance, the Money Power created the depression with the derivative trade: first blowing a huge housing bubble with them, and then busting them. Next, the shadow banking industry collapsed. As a result, the housing bubble was starved from easy credit and imploded. The Fed bailed out all the banks and billionaires with their hedgefunds, no harm done there, but Mainstreet is now saddled with a huge debt, millions of homes underwater. Nobody is bailing them out. On the contrary, it’s Wall Street that is buying up all the homes for pennies on the dollar. QE funds this, as it does the ridiculous NYSE record breaking bull run.
Meanwhile, the economy is a mess, ongoing depression and it does not look like the Money Power is done with us quite yet.
How they do it
Of course, all this is a little convoluted. One needs to see that the Banking System is indeed One, that they all own each other, that it is run from the top down globally. There is no ‘chaos’ as described by the financial press, both mainstream and alternative. The financial system is operated just as any other system.
In earlier days, bankers just had a nice confab, agreed to start calling in loans at this or that moment and creating panics and depressions was much easier. Nowadays a good story is needed. But there is an ample supply of those and the derivative trade is just the modern way of both plundering the non-insiders and controlling the entire system.
For Mainstreet, there are many stories. That greed causes it all (not untrue of course), that we need to consume less, because the Earth cannot sustain our way of life, that there is a lack of faith, that structural reform is necessary, that we are losing the competition with China, etc., etc.
But all these narratives just serve to hide the truth: that the boom/bust cycle is a totally artificial tool of plunder and centralization of wealth and power by a centralized financial system.
The Derivative Congame
Derivatives are financial products, that are derived from more ‘real’ assets.
A famous example are the Mortgage Backed Securities (MBS). Taking for instance ten mortgages, slicing them all in ten pieces, mixing a tenth of each together and selling them as one product. The buyer is then owner of one tenth of ten mortgages, instead of one complete one. The idea is that this spreads the risk of default.
Another example are the Credit Default Swaps. Lenders buy guarantees from other lenders: if a loan goes sour, the lender is no longer on the hook for the (entire) bust. The rationale is again that risks are shared by the lending community.
Very important (in terms of trading volume) are derivatives that ‘insure’ against higher or lower interest rates. Interest rates (the cost of money) ultimately drives the entire financial world and swings in interest rates can destabilize institutions.
As always, the rationale is just the sell. If we want stable interest rates, I suggest going 0% always. That certainly would solve a great deal of problems, but it would also end Plutocracy, of course, so it’s not really on the horizon for the time being.
In reality, derivatives are nowadays the main plundering scheme, run by the main players. It transpires, that the top 5 Wall Street banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) are the counter party for 95% or more of all derivatives worldwide. This means that they are ultimately on the hook for all risks insured in the entire financial sector, globally. Obviously, this is hardly stabilizing. Quite the opposite is the case, as it goes without saying that these banks simply don’t have the assets, huge as they are, to make good on their promises, should things go wrong. Which they must.
As always, in purely Orwellian fashion, their ‘idea’ of ‘spreading risks’ has in reality done the exact opposite.
This is one key reason why we have Goldman Sachs alumni in European Governments everywhere: should European sovereigns default on their loans, Goldman Sachs would be one of the players who would have to pay up as the ultimate counter party in the Credit Default Swaps market and this would vaporize them long before everything would be settled.
The derivative trade is hugely lucrative for players, as long as things go well. Their total nominal outstanding value was at some point nearing a Quadrillion, dwarfing total global GDP. What is more, they are all off balance: they are not seen as assets and they are not part of the Generally Accepted Accounting Principles (GAAP).
This means that nowadays nobody really knows anymore what the real asset position of any financial institution really is: they might have huge obligations through the derivative trade, but it’s not visible in their books.
Derivatives are obscure instruments and are nowadays the main game for fleecing unsophisticated investors. Pension funds, municipal entities, semi public institutions and the like. Interest based derivatives are simply bets: interest rates can go up or down and while they are officially for ‘insurance’ against unexpected swings, they are in reality mainly used for speculation purposes.
It is the derivative trade that brought Detroit down. Of course, Detroit is not really down, their CAFRs (Comprehensive Anual Financial Reports) show plenty of assets, but that’s another matter. However, Detroit was suckered into speculating with tax payer money, their conscience eased with the narrative that they would ‘help stabilize the Financial System’ and everybody would get rich. They went bust instead and now pensioners can pay.
Another good example is Vestia from the Netherlands, until a few years run by the now disgraced Eric Staal. A few decades ago Public Housing institutions were semi-privatized into QUANGOs (Quasi Autonomous Non Governmental Organisations),Vestia among them, with the predictable consequences: quickly rising rents and salaries for top management as a result of focus on ‘efficiency’ (profit) instead of effectiveness (service to tenants).
Eric Staal was a typical example of the ‘new manager’, ambitious, egotistical. Thinking he could play ball with the big guns. They lured him with some superhot ‘account managers’ in short skirts, copious diners, and expensive call girls. Next, his bets went south and Vestia can now cough up 2 billion euro. Which they don’t have and for which tenants can now pay up in the coming decades (with interest, of course) with higher rents.
It’s easy to blame Staal and to mock him for getting busted, but in reality the man was just suckered into something that was way above his head and this is a pure congame by soulless vipers. These people are very adept at exploiting ambition and other human weaknesses.
Larry Summers and Wall Street
August last year, Greg Palast published a bomb shell memo by Larry Summers, front running candidate to succeed Bernanke at the Fed at the time.
In the 1997 memo it was made very clear that Summers, with the Treasury at the time, was conspiring, completely illegally, with a couple of the main Wall Street Kingpins to force deregulation of the derivative scam worldwide. Rest assured that this publication was the reason that Summers missed out on the Fed presidency, which would have crowned his already despicable ‘career’.
This in itself creates the interesting question who wanted him out of the equation, and organized this by leaking to Palast, but that is another matter.
Of course Summers and the named bankers should have been arrested immediately, the memo provided more than sufficient grounds for this, and jailed for the rest of their lives. These people are the prime culprits of the 2008 implosion and should never see the light of day again. The memo shows them openly discussing the ‘end game’ of full control of the economy by the financial industry.
But hey, too big to jail, you know. Obviously, locking up people destabilizing the system would be very destabilizing in the colorful narrative of ‘democracy’ and ‘economics’ and ‘the legal system’.
But Palast’s memo was the smoking gun that proves that the derivatives scam was foisted on the financial industry by some of the highest executives of the Money Power and it must be obvious that the ‘disaster’ of 2008 was only a disaster for those picking up the tab: the tax payer and those losing their jobs, houses and businesses through artificial deflation.
The Bank of International Settlements
The BIS is the apex of the global banking system, the Central Banks’ Central Bank. It’s the main executive in what Quigley famously described as “The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.”. It’s the top of what the Economist called ‘the marvelous edifice of international finance’.
And the BIS does indeed hold a crucial trump card when it comes to the global management of the volume of money and thus the creation of the boom/bust cycle: it sets the capital reserve requirements for banks. It was the BIS raising capital reserve requirements in the late eighties that made the Japanese banks insolvent overnight, popping the outrageous Nikkei/Real Estate bubble that had overtaken Japan. They never recovered and neither did Japan.
The BIS of course knew well what was going on in the 2000’s with the derivatives and real estate. The derivatives allowed huge leveraging by the banks, many of which at some point had no more than 2% in capital reserves. BIS policy now is to raise capital reserve requirements, officially to ‘improve stability’, and this has a huge impact on the banks’ capacity to lend, guaranteeing ongoing depression.
The BIS, in its publications, is also openly calling for stronger deleveraging and the end of quantitative easing.
What does it all mean?
As we have seen above, the basic sell for derivatives is that they manage risks. This was very important, because they helped create the false sense of security with the banks and regulators in the 2000’s: the idea was that lending had lost its traditional ‘risks’ and that therefore speculation in real estate was no longer a problem and that real value was being created.
Of course, nobody in his right mind, most certainly not the bankers, believed this, but the point is that bubbles need to be blown so they can be popped and this happens to be the story with which they blew the housing bubble of the 2000’s.
Mortgage Backed Securities now made sure that everybody, including sub prime borrowers, could get a mortgage, interest rates were kept low, and housing went through the roof. Next of course problems emerge, borrowers can’t pay and Mortgage Backed Securities all of the sudden transpired to not at all have taken any risk away.
The top people of Wall Street have created the scheme top down. This has a number of important implications. In the first place: these people are not going to take undue strategic risks with the financial system. Contrary to popular folklore, it’s not short term gain that drives them primarily. They’re master strategists. They knew exactly what they were doing. They knew there were going to be huge bankrupties and they knew the Fed would bail them out. Bail outs are one of the main purposes for which they created the Fed to begin with.
After 2008, the derivative trade just continued to proliferate in a completely unsustainable way. Hundreds of trillions of nominal value and although this greatly overstates the real risks involved, it has already been shown what damage they can do. A next round is guaranteed.
It is more than interesting that it is the American banks that run the trade. The top 5 banks that are the counter parties may look strong now, but they’re actually in an extremely vulnerable position. While sold to manage risk, it’s in fact these banks that ultimately carry all risks in the financial industry. This is an accident waiting to happen.
This could be classically interpreted as just another example of American imperial over reach, but if one realizes the Money Power is not the US Empire and looking to put America and its dollar down as the hegemon, an even more sinister picture emerges. These banks are at the core of the American economy and the Money Power can at any moment detonate a nuclear bomb right at the heart of the American Empire by just popping the derivative bubble. True, it’s very difficult to fathom how the global financial system itself could survive such a melt down, but knowing what the bankers are capable of, and the direction they seem to be heading, it’s an interesting scenario.
Blowing bubbles and popping them with alternating inflations and deflations is, with Usury, the Money Power’s core business. Each cycle has its own story and derivatives are the story of the Greatest Depression. The worst is yet to come. Years of scarce money, depression and centralization of wealth lie ahead of us. They will undoubtedly manage to spring something nasty on us yet.
At the moment the economy is temporarily improving a little bit, but we have been looking for green shoots for years now. In reality, indebtedness globally, both private and public, is much worse than in 2008. For years the Central Banks have been postponing the real pain, but huge deleveraging is necessary within the current paradigms of financial management.
As always, it’s not even so much the debt, but the Usury that is the issue. Even Greece could pay off all its debts within 20 years just from what it loses to debt service today. Most nations have, since the 2nd World War, paid more in interest on their debts than they have debts outstanding.
But the banks have us exactly where they want us: unsustainable debt, a huge portion of our incomes raked in through Usury, the ‘need’ for deleveraging, resulting in deflation and thus giving them the depression they so clearly crave.
Within the paradigms of the current system, this cannot be solved. Only ending banking as it operates today can end centuries of wholly artificial booms and busts.
But this will only become possible when people stop wondering about corruption in finance and start seeing finance itself is corrupt.
The Dying Dollar and the Rise of a New Currency Order
The Inflation vs. Deflation Dialectic
Austrian Economics, Apostles of Austerity Defending Deflation
Understand that the Banking System is One
The Few Banks that Own All