How To Defuse The QUADRILLION Dollar Derivatives Bubble (Part Deux)

Last year we discussed the QUADRILLION dollar derivatives bubble and the risks that come with it.  Well, guess what?  That bubble is still there, just WAITING to pop, and thus drag down the rest of the economy with it as well due to is massive size and interconnectedness.  And it has only grown dramatically since the last major financial crisis and Great Recession in 2007-2009.  

Ellen Brown recently wrote another excellent article about what to do about it.  She notes how this dangerous derivatives bubble was no accident, but came into being via deliberate deregulation that specially privileged derivatives.  Repealing the Glass-Steagall Act in 1999 was only the start.  In 2000, the Commodity Futures Modernization Act (CFMA) not only removed derivatives from any sort of federal oversight, but it also declared them be legally enforceable, a privilege that NO other bets have ever historically enjoyed.  (Let's face it, derivatives are literally nothing more than glorified bets.)  Then in 2005, the Bankruptcy Act gave derivatives extra special "safe harbor" protections as well.  And after the Great Financial Crisis, a crisis in large part caused by wanton derivatives speculation, what law was passed to pretend to tame this out of control casino? You guessed it:  the Dodd-Frank Act of 2010, a band-aid which only further entrenched the fundamental derivatives problem that was left to fester. 

That is, fully legalized and unregulated gambling with other people's money on a truly gargantuan scale by the ultra-rich, using very questionable and opaque financial instruments, all backed by special privilege and protection of the law, is still very much a thing, alas.  And like any casino, the house (the oligarchy) always wins.  Privatize the profits, socialize the losses.  Heads, they win, tails, We the People lose.

Talk about moral hazard! 

Clearly, repealing Gramm-Leach-Bliley (the 1999 law that repealed Glass-Steagall, thus reinstating the latter), repealing the CFMA especially, repealing the "safe harbor" protections in the Bankruptcy Act, and repealing Dodd-Frank should be the absolute highest priorities to defuse this massive ticking time bomb.  No doubt about that.  That is, we must regulate derivatives at LEAST as stringently as they were in the 20th century, if not more so.  Additionally, a modest financial transactions tax (say, 0.1% on all transactions) would also be a good idea as well.  The latter can alternatively be achieved by raising and expanding the current SEC Fee to include ALL financial instruments equally, including derivatives.

We should also jettison the largely inaccurate term "hedge fund" from our collective vocabulary as well.  They should really be called "speculation funds", since that is what they really are in practice.

Oh, and to the FERAL Reserve:  CUT INTEREST RATES YESTERDAY!  And stop Quantitative Tightening yesterday as well.  It is really playing with fire in the worst way right now.  KNOCK IT OFF.

The aforementioned items would be enough to defuse it in the near term, while the following items would be to clean up the damage and/or prevent it from happening again in the future:

• Ban the practice of "quote stuffing" and other practices of deliberate market manipulation.
• Ban stock buybacks by corporations.
• Going forward, ban any and all types of new and exotic derivatives that are not completely transparent.  Opaque derivatives based on sketchy underlying fundamentals should be considered fraud, plain and simple. 
• Absolutely NO more bailouts OR "bail-ins" of the banks ever again, period (but of course depositors should still be made whole per the FDIC, with no apologies to any ultra-purist libertarians or paleoconservatives).
• Implement "Quantitative Easing For (We The) People" (that is, with direct payments to individuals, not banks) as needed.
• Phase out the practice of "fractional reserve banking" by very gradually raising the reserve ratio requirement until it reaches 100%.
• Fully nationalize the largely privately-owned FERAL Reserve to make it truly FEDERAL for once.  And established state and local public banks as well, like North Dakota currently has.
• And last but not least, all banks that are "too big to fail" are really too big to exist, and should thus be either forcibly broken up, taxed heavily, or nationalized as public utilities.  YESTERDAY!

In the meantime, we all need to brace ourselves for a possible financial crisis and recession in the future.  It is highly unlikely that Congress will act in time, as they are largely bought and paid for by Wall Street and the big banks (who also largely own the FERAL Reserve as well).  But don't fall for the idea that we should withdraw all of our money now, as that would literally be a self-fulfilling prophecy (causing a bank run).  The FDIC guarantees the first $250,000 per depositor per bank, so unless you have more than that (and didn't put it in multiple banks like you should have), it does not make sense to do so.

So what are we waiting for?