Larry Summers, the former hit man for the freemarketeers, is as much to blame for the financial collapse as Ayn Rand acolyte Alan "Bubbles" Greenspan. And he will be to bring the next crash because he still believes that American can succeed by putting financial manipulation ahead of manufacturing and services . Summers worked hand in hand with Phil Gramm to create the black hole of unregulated OTC derivatives that turned the Lehman Brothers failure into a global financial meltdown.
Alan Greenspan admitted when questioned, after the crash, by Henry Waxman that his philosophy of unregulated free markets is wrong. His libertarian free market beliefs were crushed. Larry Summers, however, while now supporting some regulation has not changed his fundamentally Republican "third way" neoliberal economic philosophy. Now derivatives are the big banks' main source of profits in 2009 after nearly wrecking U.S. economy in 2008.
The Office of the Comptroller of the Currency reported recently that the derivatives market continues to grow to about 15 times the size of the U.S. economy.
OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2009 Executive Summary
• The notional value of derivatives held by U.S. commercial banks increased $1.5 trillion in the second quarter, or 0.7%, to $203.5 trillion.
• U.S. commercial banks reported revenues of $5.2 billion trading cash and derivative instruments in the second quarter of 2009, compared to a record $9.8 billion in the first quarter.
• Net current credit exposure decreased 20% to $555 billion.
• Derivative contracts remain concentrated in interest rate products, which comprise 85% of total derivative notional values. The notional value of credit derivative contracts decreased by 8% during the quarter to $13.4 trillion.
Five too-big-to-fail banks, implicitly insured by the United States government control 97% of the derivatives market.
A total of 1,110 insured U.S. commercial banks reported derivatives activities at the end of the second quarter, an increase of 47 banks from the prior quarter. Nonetheless, most derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks
represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure. (diarist's bold)
The OCC report, then goes for a moment of levity.
While market or product concentrations are normally a concern for bank supervisors, there are three important mitigating factors with respect to derivatives activities. First, there are a number of other providers of derivatives products whose activity is not reflected in the data in this report. Second, because the highly specialized business of structuring, trading, and managing derivatives transactions requires sophisticated tools and expertise, derivatives activity is concentrated in those institutions that have the resources needed to be able to operate this business in a safe and sound manner.
It's like nothing ever happened.
Bank revenues in 2009 have been inflated by earnings from derivatives contracts. Do close ties between the large banks and the federal government give those banks and inherent advantage in "predicting" interest rate and foreign exchange market movements?
Interest Rate Q2 $1,108 Million Q1 9,099 million
Foreign Exchange Q2 $2,132 million Q1 $2,437 million
Interest rate and foreign exchange contracts have provided over 90% of bank trading revenues in the first half of 2009. Since the whole U.S. economy depends on the stability of the banking sector the whole economy is now dependent on derivatives trading.
It's a house of cards.
The house that Larry Summers and Phil Gramm built.