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Derivatives Bubble Concerns State Treasurer

by Thomas Sbrega, published

On State Treasurer Robert Lauten’s website he displays the “Act-Independent Statement” to the G-20 Summit in London, APRIL 2, 2009.  This insightful text intends to define the $1.5 Quadrillion derivates bubble, while making common sense recommendations for world leaders.  Derivatives played a key role in the Orange County disaster during the Clinton years.    Regarding the Orange County meltdown, Business Week encouragingly noted in 1994:  “The meltdown also could invite an era of far more intense regulation in both the municipal and derivatives markets--both of which, until now, have largely avoided Washington's gaze.”  Today, it doesn’t appear anyone took that invitation.  Although the very word “derivative” has become taboo, derivatives are quite simply “financial instruments based on other financial instruments – paper based on paper.”  Today terms such as “toxic assets” and “complex securities” are more common.  These include credit default swaps (prominent in the AIG fall), collateralized debt obligations, structured investment vehicles and asset-backed securities.  The solution?  “Virtually all governments should be able to use their emergency economic powers to freeze derivatives...” Perhaps derivatives were illegal between 1936 and 1983 for a reason.  This law was repealed by the Futures Trading Act of 1982. The Bush-Paulson-Obama-Geithner policy to bail out the world derivatives bubble ($10 trillion from the Fed and Treasury) is referred to as a zombie idea.  “Derivatives pose the question of fictitious capital.”

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