Deregulation, Derivatives And The Threat Of Mass Destruction
Posted October 21, 2016
[Read this free chapter from The Corruption Of Capitalism now.]
Eight years after the global financial system came very close to being destroyed by out of control speculation in the unregulated derivatives market, there is still nearly Half A Quadrillion Dollars worth of derivatives trading in opaque Over The Counter (OTC) markets. Next week I will upload a new Macro Watch video describing what has been done since the crisis to bring these “financial instruments of mass destruction” under control.
Some progress has been made, but it has been incredibly slow. The vast majority of all derivatives still do not trade through exchanges. Consequently, the continuing lack of transparency means there is still a real risk that derivatives are being used to illegally manipulate interest rates, currencies and commodities. Moreover, margin requirements are still not in force. Margins provide a buffer that reduces counterparty risks. The lack of margins increases the danger that the failure of one counterparty could spread contagion and result in systemic collapse, as the near-failure of AIG came close to doing in 2008.
My second book, The Corruption of Capitalism (2009), contained a chapter called Deregulation, Derivatives And The Threat Of Mass Destruction. It describes how derivatives were deregulated and points a finger at those most responsible. Alan Greenspan is heavily criticized for his role in the fiasco.
This chapter serves as a good introduction to next week’s video. It’s a truly incredible story. I hope you will read it.
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