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ADDING VALUE TO THE ECONOMY AND THE DERIVATIVES GAME

December 29, 2014

ADDING VALUE TO THE ECONOMY AND THE DERIVATIVES GAME

The ultimate purpose of business enterprise from a social point of view is that conduct of the enterprise must add value to the economy, that the goods and services offered by the entrepreneur are needed or wanted, can be created and offered at a profit etc.  Thus new wealth is created with astute management and combination of such factors of production which can be shared among those who are involved in the chain of production, i.e., those who finance the operation, those who manage it and those who labor under the direction of management to produce such goods and services for sale or exchange – and all at competitive prices in an open marketplace.

Obviously much more is involved in areas of the environment in which such goods and services are produced and marketed, including but not limited to zoning restrictions, local taxation and the like, but from a social point of view (aside from making a profit), the fundamental idea is that the business enterprise must add value to the economy, whether it be in the form of a better mousetrap, widget, call center, durable goods factory, supermarket or whatever, and irrespective of whether what is produced for sale or exchange is tangible (autos etc.) or intangible (insurance, medical offices etc.).

Applying the fundamental principle that a business enterprise with its activities must finally add value to the economy, let’s take a look at the derivatives peddled by the big Wall Street banks that nearly brought the world to international depression in 2007-2008 followed by Bush’s Great Recession (from which we who live in the real economy have not yet recovered). First, let’s define our terms (since many may not know what a “derivative” is).

Derivatives allow banks and investors to make bets on the performance of assets such as stocks, bonds and currencies without putting much money down. Borrowing (or leveraging) such  huge sums of money they gamble via “derivatives” can generate large gains or losses and can trigger sudden and huge demand for added cash collateral in the event of loss (as JP Morgan Chase, the number one bank with currently  some $70 trillion in derivatives found out recently with a $6 billion dollar derivatives trading loss  on its London trading desk – with Citigroup next at $62 trillion in derivatives followed by Morgan Stanley and Bank of America next in line as of June, 2014, per the United States Comptroller of the Currency). (For some perspective on the enormous exposure to loss here, consider that the total exposure of big Wall Street banks as of June, 2014, was about 180 trillion dollars and that the entire annual GDP of the United States  is under $20 trillion dollars, a  more than 9 to 1 ratio.)

The big Wall Street banks act as a bookmaking service by taking bets from others that tend to cancel one another out, but there are exceptions. Thus Goldman Sachs and Citigroup had to have a government bailout after their insurer (AIG, which you and I also bailed out) could not meet collateral demands on its soured mortgage bets made during the real estate bubble.

Consider this: That before Clinton in the biggest mistake he made in his eight years as president (and on the advice of Bob Rubin and Alan Greenspan, both Wall Street bank moguls who worked in and out of government) signed a repeal of the Glass-Steagall Act in 1999, any such losses would have been solely the responsibility of the big banks, their insurers, hedge fund operators and others who may have extended credit or otherwise have collateralized the banks’ crapshoots. With repeal of Glass-Steagall, unfortunately, the taxpayer once again was on the hook for the banks’ casino games, as we found to our dismay when we bailed out the big banks, their insurers and even their shareholders under the aegis  of George Bush.

The Dodd-Frank Act of 2010 was in part designed to end the contingent liability of the taxpayer to bail out the bad bets Wall Street banks made with derivatives. The recent “spending bill” (now law) contained a rider which negated that end of liability and we are now back to backstopping the big banks’ casino crapshoots. Our FDIC-insured deposits are now once again available to the big banks to cover their losses in their trading of derivatives, and given the size of that market, there is much to fear.

We are involuntary co-signers on obligations in which we had no voice in undertaking and can only stand to lose money since all profits from such undertakings (if any) go to the big banks in a heads I win, tails you lose arrangement provided by this rider to the recently adopted “spending bill.” This rider should have been stripped from the bill but was not and is now law. Our urgent task now is to either repeal this part of the law or pass new legislation which will alter its effects so that you and I are off the hook in providing cover for the big banks’ crapshoots. One would think we have learned our lesson of only six years ago, but we have not taken into account the power of Wall Street banks’ “campaign contributions” (known in my day as bribes) and their effect upon the voting patterns of pandering politicians.

All the foregoing is prelude to the following question: How does trading in derivatives “add value to the economy?” It is not an economic activity as we understand it; it is rather a betting game on the performance of assets actually involved in economic activities. It produces nothing tangible or intangible in terms of goods and services; it is a crap game in which the banks bet on economic activities conducted by others. It has nothing to do with the production of goods and services; it is gambling pure and simple, and you and I are forced to back up their crapshoots the results of which add no value to the economy or any of the players in it (but which could cause huge losses to our treasury with no possibility of gain). I fail to see one iota of social responsibility for backstopping the potential losses of gamblers whose only connection with the economy is that they are betting on the performances of some of its performers. Is that an appropriate use of our tax money while we are in deficit, or even if we were in surplus, for that matter? What public purpose is served by our exposure to economic depression?

I see no purpose in publicly backstopping gamblers’ bets on anything, including the economic performances of others, and I here propose that we go one step further. I propose that we not only remove FDIC-insured funds from the bank gamblers’ backstops in case of loss; I propose that we ban  derivatives trading altogether by any bank as a condition for its continuing licensing as a bank, bank holding company or other such financial institution currently involved in trading of derivatives. Bank shareholders need protection from predatory and greedy management of their own banks as well.

What possible public purpose is served by backstopping gamblers’ bets on any performance where the public is liable to pay for such gamblers’ losses but precluded from sharing any gains, and as for derivatives, who needs them?  They add zero value to the economy. Let’s end this rider mania in exchange for campaign contributions to greedy and  pandering politicians by outlawing trading in derivatives altogether, and soon, because as of now you and I are on the hook.   GERALD     E

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