Four U.S. banks held $168 trillion in derivatives at the end of 2023. It would take only one counterparty failure to bring down the whole shooting match. From Ellen Brown at scheerpost.com:
“It was not the highly visible acts of Congress but the seemingly mundane and often nontransparent actions of regulatory agencies that empowered the great transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses into providers of wholesale financial risk management and intermediation services.”
— Professor Saule Omarova, “The Quiet Metamorphosis, How Derivatives Changed the Business of Banking” University of Miami Law Review, 2009
While the world is absorbed in the U.S. election drama, the derivatives time bomb continues to tick menacingly backstage. No one knows the actual size of the derivatives market, since a major portion of it is traded over-the-counter, hidden in off-balance-sheet special purpose vehicles. However, when Warren Buffet famously labeled derivatives “financial weapons of mass destruction” in 2002, its “notional value” was estimated at $56 trillion. Twenty years later, the Bank for International Settlements estimated that value at $610 trillion. And financial commentators have put it as high as $2.3 quadrillion or even $3.7 quadrillion, far exceeding global GDP, which was about $100 trillion in 2022. A quadrillion is 1,000 trillion.
Most of this casino is run through the same banks that hold our deposits for safekeeping. Derivatives are sold as “insurance” against risk, but they actually add a heavy layer of risk because the market is so interconnected that any failure can have a domino effect. Most of the banks involved are also designated “too big to fail,” which means we the people will be bailing them out if they do fail.
Derivatives are considered so risky that the Bankruptcy Act of 2005 and the Uniform Commercial Code grant them (along with repo trades) “super-priority” in bankruptcy. That means if a bank goes bankrupt, derivative and repo claims are settled first, drawing from the same pool of liquidity that holds our deposits. (See David Rogers Webb’s The Great Taking and my earlier articles here and here.) A derivatives crisis could easily vacuum up that pool, leaving nothing for us as depositors — or for the “secured” creditors who are junior to derivative and repo claimants in bankruptcy, including state and local governments.
In the early phase of capitalist development, bourgeois political economy, by championing the interests of the emerging bourgeoisie in its struggle against the pre-existing dominant class, performs a radical scientific role in exposing the nature of commodity-producing precapitalist society. In the later phase of capitalism, however, bourgeois political economy turns to justification of the system in which the bourgeoisie has become ascendant and is threatened by the growing workers’ movement. It thereby loses its scientific role, a role which is to be taken by Marxian political economy rooted in the interests of the working class.
Nikolai Bukharin
Fun Trivia-Red Diaper Baby Kamal’s father of Stanford is a disciple of Bukharin.
The Long March is dead, long live the Long March.
Democracy, it’s got electrolytes!
(H/T-Battleswarm)