The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives
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The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Posted on September 18, 2013 by WashingtonsBlog

 

English: The great asset bubble. 01 Central ba...

English: The great asset bubble. 01 Central banks gold reserves – $0,845 tn. 02 M0 (paper money) – $3,9 tn. 03 traditional (fractional reserve) banking assets – $39 tn. 04 shadow banking assets – $62 tn. 05 other assets – $290 tn. 06 Bail-out money (early 2009) – $1,9 tn. (Photo credit: Wikipedia)

Guest post by Ellen Brown, http://www.WebofDebt.com.

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding.  But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

via The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives | Washington’s Blog.

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2 Responses to "The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives"

  1. Judith Davidson Cook on Facebook  September 19, 2013 at 1:25 pm

    Derivatives were re-enacted by Bush and his gang of thieves, (even though they were outlawed in the 20’s) they have looted America and driven this country to the edge of disaster! They all ought to be SHOT! I think anyone who used derivatives should have their money confiscated!! and be prosecuted!!!

  2. Judith Davidson Cook on Facebook  September 19, 2013 at 1:29 pm

    In fact, this problem is SO huge, and destructive that Wall Steet needs to be shut down until this mess can be cleaned up and the guilty are sent to prison! This is Terrorism!!

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