The following is an article prepared for the next issue of EIR, by John Hoeffle, followed by a statement by Lyndon LaRouche, both on the urgency of writing off the quadrillion dollars of derivatives junk. Mike
Derivatives or Civilization, Take Your Pick
09 Oct 2008
October 9, 2008 (LPAC)--The banks are blowing out, the stock market is plunging, the economy is in free fall, all despite almost daily interventions into the financial system by the central banks and governments around the world. The efforts of Treasury Secretary Henry Paulson and his Plunge Protection Team are being overwhelmed, as the largest volume of financial bets in world history crushes their bailout efforts, which while unprecedented in scope, are nevertheless puny in comparison to the tumor they are trying to save.
Driving all of this is the global casino known as the derivatives markets, a market which dwarfs the world's mortgage, bond and the stock markets, combined. While mortgages, stocks and bonds are measured in the trillions of dollars, the derivatives market is measured in quadrillions, or thousands of trillions of dollars. Putting a number to the size of the derivatives market is virtually impossible, but putting a number to the value of the derivatives market is easy--zero!
Derivatives were the great financial innovation of the Greenspan era, in which casino-style bets on the price movements of currencies, bonds and stocks replaced the ownership of those items as a way to make money. The bets thus placed soon far outstripped the levels of the markets upon which they were nominally based, as derivatives became the prime source of "profit" for the financial markets. That these "profits" were entirely fictitious, a fancy form of casino-floor betting chips, was considered irrelevant as long as the market was growing and the funny money was pouring in. Last summer, however, the financial system died, sealing the doom of the derivatives game.
Today, the collapse of the derivatives market is crushing the international financial system, as the speculators fight to save the fictitious "profits" through the largest bailout attempt in history. We stress attempt, because the bailout is not working, and can not work--there isn't enough money in the world to cover all these funny-money bets, and the efforts by the central banks to print that money, is fuelling a hyperinflationary bomb which will wipe out not only the remnants of financial system, but also the governments, national economies and the means of existence for most of the world's population. Hyperinflation will destroy the value of the dollar itself, wiping out pensions, savings, bank accounts, stock portfolios, and all other monetary values, bankrupting households, businesses and governments, leaving the nation destroyed, and, effectively, no longer a nation. We have barely scratched the surface of the horrors that will come, if we continue down this path.
Therefore, it is essential that the bailout of the derivatives bubble be stopped, immediately. All derivatives trades should be declared null and void, and wiped off the books of the speculators. Any financial instrument containing a derivative should also be declared null and void, and wiped off the books. This unregulated, insanely leveraged casino should be shut down, and all claims arising from derivatives bets nullified, as if the bets had never occurred.
We have already suffered far too much from the effects of this unfettered speculation, watching as money which should have gone into infrastructure and essential services for the population, instead be siphoned off into the virtual world of derivatives betting. It is a parasite which is killing us, and now the parasite would destroy us all to protect itself from the destruction it has wrought. It is past time that we shut it down, wiped the gambling debts off the books, and let the parasites collapse. We have a world to rebuild, for the future of mankind.
There can be no compromise on this. Shut it down, and shut it down now. Your life, and the nation, depends upon it.
LaRouche: It's The Derivatives, Stupid!
09 Oct 2008
Derivatives: The Hyperinflationary Bomb Crushing The International Financial System
October 9, 2008 (LPAC)--Lyndon LaRouche today mocked Treasury Secretary Hank Paulson's bailout scheme, warning that “Paulson and all the other central bankers have been lying through their teeth about their ever-changing so-called bailout swindles. The real problem, that none of them wish to talk about, is the mass of derivatives obligations, that are in the quadrillions of dollars.”
LaRouche called the derivatives bubble the “hyperinflationary bomb, crushing the international financial system,” warning, “Until you just shut down the whole derivatives trade--wipe these gambling obligations off the books of the financial system--you are just kidding yourself.” LaRouche declared, “It is time to break the silence on derivatives. The true, hyperinflationary factor in the situation is the unregulated, insanely leveraged derivatives trade. This is what is killing us. This is the great crime of Alan Greenspan.”
According to the most recent data, released June 30, 2008 by the Office of the Comptroller of the Currency, the three largest American bank holding companies, JP Morgan Chase, Bank of America and Citicorp, had current outstanding derivatives contracts, totaling $179.4 trillion dollars. The three banks combined have total assets of just under $5.6 trillion!
As of Dec. 31, 2007, according to the Bank for International Settlements, the total over-the-counter and exchange-traded derivatives totaled more than $675 trillion. However, these “authoritative” figures are, according to Executive Intelligence Review analyst John Hoefle, grossly understated. The true figures, Hoefle estimated, are well-above a quadrillion dollars.
LaRouche concluded: “Unless and until you deal with this derivatives bubble, which cannot and should not be bailed out, you are just kidding yourself. It is time for Hank Paulson to swallow the only real medicine: bankruptcy reorganization of the entire, dollar-based financial system. And the first step in any such bankruptcy reorganization would be the cancellation of these quadrillions of dollars in pure gambling obligations. Without such action, this planet is doomed to a horrible dark age, just like the dark age of the 14th century, that followed the collapse of the Lombard banking system.”