Derivative Monster Alive and Kicking Despite Financial Reforms

"Anyone who thinks the new financial reform law will save us from the next debt disaster must be dreaming. Here are the facts …

Fact #1 Derivatives at U.S. Banks to Be Shifted Like Deck Chairs on the Titanic

In its latest update, the Comptroller of the Currency (OCC) reports that the national value of derivatives held by U.S. commercial banks is $216.5 trillion, or nearly FIFTEEN times the nation’s Gross Domestic Product.

Moreover, instead of diminishing, they’re getting larger, up by $3.6 trillion — the equivalent of one full quarter of GDP — in just the most recent three-month period.

Fact #2 The Derivatives Monster Overseas Is Twice as Big. But Nothing Whatsoever Is Being Done to Tame It.
 
The Bank of International Settlements (BIS) reports that, at year-end 2009, the total notional amount of derivatives traded on the over-the-counter market globally was $614.7 trillion.

In addition, the total traded on organized exchanges was $21.7 trillion in futures contracts and another $51.4 trillion in options.

Grand total globally: $687.8 trillion.

Problem: At this juncture, strictly the portion held by U.S. banks (the $216.5 trillion tabulated by the OCC) has anything to do with the new legislation. The balance of $471.3 trillion — TWICE as much — remains outside the realm of any reforms.

Fact #3 Financial Reform Does Nothing to Curb The Two Biggest Risk-Mongers of All: The Treasury and the Fed
 
The financial reform bill grants both the U.S. Treasury Department and the Federal Reserve new powers and responsibilities to control and monitor the risk-taking of large financial institutions.

What’s ironic, however, is that these are precisely the agencies that have created — and continue to create — the greatest systemic risks of all:

The Treasury, by running the largest federal deficits of all time, exposes the U.S. bond market to the same kind of contagion risk that recently struck Greece, Spain, Portugal, and Hungary. And …

The Federal Reserve, by massively increasing the U.S. monetary base, helps create the same kind of speculative bubbles that caused the debt crisis in the first place."