Too Big to FAIL , again?

[mouser]

Too big to fail banks continue to get more reckless.

It is common knowledge that Western banksters operate their own private “casino” - known as the global derivatives market. This unregulated “playground” for the most reckless generation of bankers the world has ever seen finally attracted wide-spread attention as the “notional value” of this casino/market soared exponentially to $1.1 quadrillion ($1,100,000,000,000,000) – more than twenty times the size of the entire global economy.

Shortly after this, the Bank for International Settlements (the institution which sort of keeps track of derivatives) changed its definitions of this market, in order to slash that astronomical number by more than 50%. Currently, the BIS estimates the size of this market at over $400 TRILLION – and once again rising. Along with the cosmetic changes made by the BIS to reduce the (apparent) size of these “financial WMDs,” we have had one bankster after another assure the world that because the “net exposure”of individual institutions is small, that this unregulated casino posed no threat/risk for the global financial system.

A very interesting article by The Telegraph's Ambrose Pritchard-Evans points out that we have just seen that those bankster-assurances are false.

The problem was/is that as soon as this ridiculously over-leveraged market is subjected to the slightest stress that “net exposures” become irrelevant – and it is the unbelievably massive gross positions of these bankers which are of true significance. The flaw in the banksters' myth is actually quite simple and obvious (now that someone else has pointed it out!).

The only way in which individual banks can rely upon their “net exposure” is if every “link” in these derivatives-chains are able to “perform” on their portion of the contract. What we saw (only one year ago) is that this market completely “froze up” last fall – meaning virtually no one was ready/willing/able to “perform.”

The moment this scenario arises, then “net exposure” becomes totally irrelevant, and it is the massive, gross exposure of these institutions which puts themselves (and the entire global financial system) at immediate risk of default – and collapse. The fact that the BIS changed its definitions to pretend this market is smaller than it is, the fact that this market is once again increasing in size, and the fact that the banksters' myth has remained unchallenged (until now), demonstrates that no lessons have been learned.

The only element of reform on the horizon is the proposal to establish “clearing houses” for derivatives market. This is supposed to bring both “liquidity” and more realistic valuations to this market. The problem is that what is of overwhelming importance to this market is not liquidity, or even the lack of any realistic valuation-mechanism. The problem is the insane amount of leverage which has been incorporated into this market – and which has not changed, in the slightest.

Quite simply, there is no possible way to ever supply enough “liquidity” to a single market, which is so much larger than the entire global economy – without simply printing up trillions of dollars overnight (essentially what took place last fall). Such reckless “fixes” for this market not only unleash punishing waves of inflation on the entire global economy, but as I pointed out in a recent commentary (see “Minsky, “bubbles”, and gold”), creating these much larger pools of aimless capital actually serve to greatly destabilize the global economy even further.

On the same day that the article in The Telegraph appeared, another article came out, with former economics Nobel Prize winner Joseph Stiglitz saying that the instability in the U.S. financial sector has actually gotten worse because the U.S. government has been allowing most of the “too big to fail” banking oligarchies to get even bigger.

In short, nothing has been “fixed”. This is proven simply by noting that most of the world's central banks have their “overnight lending rates” at less than 1% (the lowest in economic history) – with no sign of those inflationary, destabilizing interest rates changing any time in the foreseeable future. It is obvious that problems caused by lax credit and excessive money-creation cannot be solved by even looser credit, and even more-excessive money-creation.

Clearly the banksters believe the “problem” has been solved: when they win with their derivative “bets” in their private casino, they keep the winnings – and when they lose their bets, the U.S. taxpayer pays for their losses. And to make the system “perfect,” the Obama regime is about to make the Federal Reserve the sole “watchdog” for systemic risk – the same Federal Reserve which claims it was totally unable to see the largest asset-bubble in the history of human commerce (despite the fact the Fed created that bubble with its own reckless policies).

With the banksters preparing to increase their obscene “performance bonuses” (i.e. loot even more from their corporate coffers), with the U.S.'s so-called “accounting regulator” legitimizing their mark-to-fantasy accounting, and with no sign of even the slightest, meaningful reform on the horizon, the message from the U.S. financial crime syndicate is clear: its “business as usual.”

Somehow, I don't think this is what the American people envisioned as an outcome, when they were forced to ante-up $10 trillion in loans, hand-outs and guarantees – to avoid the immediate implosion of every one of these hopelessly corrupt oligarchies.