[Vision2020] Legacy of the Clinton Bubble: US Held Credit Default Swaps Larger Than US GDP!?

[Ted Moffett]

Perhaps the currently increasing deficit spending of the US federal
government is not the best long term way to address the financial crisis.
This approach is based on the assumption of large scale future growth in the
global economic system, to cover the debt, growth that may face serious
obstacles:  oil depletion, environmental crises, Middle East war given
Iran's possible nuclear weapons ambitions and Israel taking military action,
and the ongoing global financial crisis.

But if the global economy does boom in the coming decades, with lowering of
US health care costs, a cornerstone of Obama's long term plan to address
ballooning federal spending on medical care, and reform of the financial
system, the US federal debt might paid down, especially if foreign war
spending can also be dramatically lowered, a rather dubious assumption.
Afghanistan could turn into a much more costly quagmire.  And the Iraq
quagmire may require the US to maintain a larger costly force than is hoped,
for much longer than optimists predict.  Roll those dice...

But some economists argue we should let the financial system find its own
bottom, rather than federal bail outs for banks and corporations (let
General Motors fail), take the pain, and then rebuild with a more solid
economic foundation, even if the US would enter another Great Depression.
However, while those who oppose increasing federal spending protest, they
might be protesting even more vehemently if the US economy collapsed.

What would a more solid economic foundation involve?

Part of the underlying cause for the current financial and job recession was
the irrational exuberance of those who encouraged the multinational free
market/trade capitalist system to run wild, *viewing the unregulated "magic
of the marketplace" almost like a tenet of capitalism as a religion:*
**
http://www.dissentmagazine.org/article/?article=1229
**
*Joseph Stiglitz, the 2001 Nobel laureate in economics, has noted the
agenda’s many unscientific assumptions and refers to its promoters as “free
market fundamentalists.”
*
-----------------------
Clinton's presidency bought into this exuberance with measures to deregulate
financial institutions and transactions as described in the article *"Legacy
of the Clinton Bubble,"* quoted above and below, and the Bush presidency
allowed the situation to reach crisis proportions:

*THE CLINTON administration’s free-market program culminated in two
momentous deregulatory acts. Near the end of his eight years in office,
Clinton signed into law the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999, one of the most far-reaching banking reforms
since the Great Depression. It swept aside parts of the Glass-Steagall Act
of 1933 that had provided significant regulatory firewalls between
commercial banks, insurance companies, securities firms, and investment
banks.
----------*
*In 1993, the Securities and Exchange Commission (SEC) had considered
extending capital requirements to derivatives, but such proposals went
nowhere, and Wall Street lobbied to prevent any regulation of derivatives.
Then in December 2000, in his final weeks in office, Bill Clinton signed
into law the Commodity Futures Modernization Act, which shielded the markets
for derivatives from federal regulation.
--------------------*

Banking and financial institutions expanded use of unregulated or poorly
regulated financial instruments (credit default swaps, collateralized debt
obligations, derivatives...) created a gigantic economic bubble, which
collapsed.  *The Iraq war spending, even the total US federal debt, is small
in comparison to the amount of exposure the US economy faced when this
bubble collapsed.*

We have heard a lot about the sub prime mortgage collapse causing the
economic crisis.  However, the pending credit default swap collapse was
gigantic, part of the reason insurance giant AIG had to be bailed out, or so
they say.  When I first heard about the value of credit default swaps, I
thought it must be a mistake.  *There was more "money" tied up in CDSs than
in the the entire global economy:*

http://www.financialdirector.co.uk/financial-director/analysis/2229124/murky-game-pass-parcel-4311313

*As **Securities and Exchange Commission* <http://www.sec.gov/>* chairman
Christopher Cox observed in a recent article in the New York Times, CDSs are
entirely unregulated and constitute, he says, a $55 trillion market which is
“more than the gross national product of all the world’s nations combined”.*
------------------
Global credit default swaps value, according to the source below, was *62
trillion in 2007.  This fantasy land of financial risk is difficult to
exactly estimate the value of... *The value of credit default swaps held by
US financial institutions, according to the source below, *14 trillion,* was
greater in 2007 than the *entire GDP of the US, at 13.84 trillion:*
**
http://money.howstuffworks.com/credit-default-swap.htm/printable
**
*If the subprime securities market crisis that stalled the U.S. economy in
2008 was a threat, the CDS market posed a potential death sentence.*
*-----*
**
*In 2007, the global credit default swaps market was valued at $62 trillion
[source: ISDA<http://howstuffworks.com/framed.htm?parent=credit-default-swap.htm&url=http://www.isda.org/statistics/pdf/ISDA-Market-Survey-historical-data.pdf>].
The U.S. mortgage securities market had a value of about $7 trillion
[source: New York
Times<http://money.howstuffworks.com/credit-default-swap.htm/credit-default-swap3.htm#morgensen>].

 *

*To put the CDS situation into even further perspective, the gross domestic
product (GDP) of the United States in 2007 -- the total value of all the
goods and services generated in the country that year -- was $13.84 trillion
[source: **CIA*<https://www.cia.gov/library/publications/the-world-factbook/geos/us.html#Econ>
*]. In the third quarter of that same year, the top 25
**banks*<http://money.howstuffworks.com/personal-finance/banking/bank.htm>
* in the United States held $14 trillion in credit default swaps [source: **New
York Times*<http://money.howstuffworks.com/credit-default-swap.htm/credit-default-swap3.htm#morgensen>
*]. ­ So even if the United States could liquidate its entire GDP for the
year at once, it still wouldn't cover U.S. CDS losses should a series of
credit events -- those triggers for CDS payouts -- occur.*

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Vision2020 Post: Ted Moffett
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