I haven't posted anything in a while, so if I break some long standing no-no rule you have my apologies in advance. But I just read an article at Mother Jones that was so disturbing I felt the need to inform the KOS community about it.
The MJ article outlines how four senators, Randy Hultgren (R-Ill.), Jim Himes (D-Conn.), Richard Hudson (R-NC), and Sean Patrick Mahoney (D-NY) have sponsored a bill (Swaps Regulatory Improvement Act) that would permit banks like Citigroup to insure their derivatives with FDIC insurance. For the record, the US government doesn’t contribute to the FDIC. The FDIC receives funding from premiums paid by private financial institutions and interest on Treasury bonds. But here’s the rub. As of 2008 US financial institutions maintained about 70 TRILLION dollars in derivatives. If the economy were to implode again as it did in 2008 there wouldn’t be enough money on planet earth, let alone in FDIC coffers to cover the money that would be lost in derivatives.
Second, derivatives ARE NOT money; they are “bets” whose “value” fluctuates along with the thing they are betting on. For example, the 2008 housing crisis could be more accurately defined as the “2008 Housing Derivative” crisis. If just the cost of homes had imploded, it’s estimated the market would have lost about a trillion dollars. But the fact that mortgages were repackaged as derivatives/securities (read “bets”) meant that banks and investors had placed bets to the tune of 70 TRILLION dollars on a couple of trillion worth of homes. Hence when the market crashed, not only did home prices implode but so did 70 trillion worth of bets that couldn’t be paid off with insurance money because there wasn’t enough to do so. THAT’s why the recession was so deep and long lasting. Since financial institutions had added the value of their bets/derivatives to their bottom line, they essentially went broke. Please stay with me.
I’m sure most of you are aware that the primary reason we got into the mess we did in 2008 was because the provisions of the Glass-Steagall Act, established during the Great Depression, which forbade commercial and investment banks from using each other’s money, were eliminated in 1999 by the Financial Services Modernization Act, aka the Graham, Leach, Bliley Act (after the three GOP idiots that introduced it). To the best of my knowledge the GOP refused to allow Glass-Steagall to be part of the financial reforms initiated by the Obama Administration. Hence the Achilles Heel of the financial markets is still alive, well and festering.
This is what makes the new “Swaps Regulatory Improvement Act” so bad. Not only do financial institutions want to insure their bets (again)with real money, but NOTHING substantive has been done to prevent the financial markets from recreating the financial scenario that lead up to the 2008 crash. In short if the market destroys itself again, the FDIC will go bankrupt trying to stave off a new wave of bank insolvencies, and that means YOU AND I will get stuck bailing them out AGAIN. But since the FDIC also insures OUR deposits they will likely be wiped out along with everyone else’s. Welcome back to the 1930’s.