The 2008 global economic meltdown led to a deluge of lost homes, dissolved jobs, suicides, deaths of citizens who couldn’t afford health care, and broke governments ruining more lives through attempts at austerity. The Economist published a recent column citing that we’re just now experiencing the true magnitude of the Ongoing Global Depression that government and Big Media timidly refer to as the Great Recession.
Analysts examining reasons for the tragic worldwide crash basically agreed on two major culprits: the $600 trillion (at the time) derivatives market and subprime lending—two devastating zombie creations of Wall Street’s wolves, backed by Washington’s jackals.
Well, recent reports from several sources these days agree: the two stalking zombies are back, feeding their hunger.
Derivatives, Lending and Betting
What is a derivative? It’s a special contract that derives its value from an underlying asset. A form of risky financial gambling. For example (to simplify a complex process), in 2006, a bank might provide a $500,000 mortgage to someone with little or no credit. Then the bank might purchase $1 million in insurance on that mortgage, a bet to make money if the homeowner reneged. That $1 million investment derived from the underlying asset: the home. Then other, larger investments (bets) would derive from that, probably from other banks or investors. Sound insane? Yep.
The insanity can be seen in two simple figures: according to The World Bank, the global domestic product (GDP), or underlying assets, in 2007 was $54.3 trillion. But the over-the-counter derivatives market was over $600 trillion. Wall Street and Washington knew that couldn’t last. And it didn’t. In 2006, the housing bubble burst, and by 2008, the global economy had melted. But Wall Street’s wolves made a lot of money, including buying up competitive banks who had placed the wrong bets.
What’s worse, these derivatives, sold over the counter, are nontransparent: the public can’t see what the Wall Street wolves are doing with derivatives. This thanks to Congress, which in 2000 passed the Commodity Futures Modernization Act (CFMA), and President Bill Clinton signed it.
The federal Financial Crisis Inquiry Commission—the panel assigned to analyze what happened in the 2008 worldwide economic meltdown—heavily criticized this law. The commission said flatly:
The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.
If governments can’t regulate the gambling Wall Street wolves, guess who gets devoured?
Mayra Rodríguez Valladares, managing principal at MRV Associates, a capital markets and financial regulatory consulting and training firm in New York, last month warned that the wolves are back. In a May 13 article in The New York Times, she stated:
Despite slow economic growth in the United States and most of Europe still in or hovering around recession, global derivatives markets are 20 percent larger than in 2007. The Bank for International Settlements announced late last week that the global derivatives market is about $710 trillion…Higher volumes are a strong indication that derivatives players’ operational risk is rising…
…Not only is the enormous size of these portfolios of concern, so is the fact that less than 5 percent of the portfolios are regulated and transparent exchange-traded products. The rest is in far more lucrative, opaque over-the-counter products.
Others agree with her, including Forbes, who saw it a year ago, and Financial News, which discussed it in late May.
Scrapping Glass-Steagall and Your Shield
A second major reason that led to the global meltdown originated in Congress a year before it passed the CFMA of 2000. The Financial Services Modernization Act of 1999,
also signed by Clinton, removed the Glass-Steagall Act of 1933. From after the Great Depression until 1999, Glass-Steagall had separated commercial banks from securities firms. It protected your checking and savings accounts and home mortgages from the Wall Street gamblers.
After signing the FSMA, also called the Gramm-Leach-Bliley Act for the legislators who formed it, Bill Clinton said, “The Glass-Steagall law is no longer appropriate.” He couldn’t have been more wrong. Just as Wall Street’s wolves had done before the Great Depression, they began betting customers’ money by combining securities with bad mortgages until the bubble burst, making great sums while the rest of America and the world suffered, and continues to suffer.
The wolves’ freedom allowed them to make big bucks with subprime lending: i.e., making loans to people who won’t be able to pay the money back. What better way for wolves to devour profits than bet on the loans through derivatives, then, add to profit by repossessing the property and selling it again?
Of course, the subprime racket is also back, this time victimizing businesses. Bloomberg reported this in its May article “Wall Street Finds New Subprime With 125% Business Loans”:
From an office near New York’s Times Square, people trained by a veteran of Jordan Belfort’s boiler room call truckers, contractors and florists across the country pitching loans with annual interest rates as high as 125 percent, according to more than two dozen former employees and clients. When borrowers can’t pay, Naidus’s World Business Lenders LLC seizes their vehicles and assets, sometimes sending them into bankruptcy.
Naidus isn’t the only one turning to subprime business lending. Mortgage brokers and former stock salesmen looking for new ways to make fast profits are pushing the loans, which aren’t covered by federal consumer safeguards. Goldman Sachs Group Inc. (GS) and Google Inc. are among those financing his competitors, which charge similar rates…
Subprime business lending — the industry prefers to be called “alternative” — has swelled to more than $3 billion a year, estimates Marc Glazer, who has researched his competitors as head of Business Financial Services Inc., a lender in Coral Springs, Florida. That’s twice the volume of small loans guaranteed by the Small Business Administration.
Business as usual in the Wall Street lair. But the Millionaire Congress and Millionaire President will stop that by bringing back Glass-Steagall or enforcing current laws and regulations prohibiting predatory lending. Right? Don’t bet on it.
Oh, the federal Justice Department slaps a bank’s hand from time to time. But in the U.S., we don’t execute finance crooks like they do in Iran for ruining people’s lives, or imprison them like Iceland. We fine them, so they can pay with clients’ money. And meanwhile, the Federal Reserve keeps printing money to buy the banks’ bonds, and they continue risky investments rather than help consumers with those funds.
Bottom line: If you want to protect your homes, businesses, and bank deposits, you might want to get organized, get educated, and get active in forcing Congress to bring back Glass-Steagall. That would be a good start. Because a bad ending again seems to be looming.