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

[Ted Moffett]

Regarding the "Off List" response to the post below, the question mark after
the statement regarding credit default swaps valuation as larger than the US
GDP indicates just that, doubt about the truth of the statement, which of
course I was merely repeating from the source offered.  Also, I state
explicitly in the post that it is difficult to determine the value of CDS.

Regarding the risk CDS pose to the US and global economy, they are
substantial, as a large number of professional economists have stated.
Consider the data below on the expansion of CDS from 2001 to 2007, from
918.9 billion to 62,173.2 billion (over 62 trillion dollars, whis is a value
more than the 2007 global annual gross domestic product):

http://www.iii.org/financial2/securities/derivatives/

Note also from the same source the global derivatives market expansion from
about 94 trillion in 1998, to over 676 trillion in 2007.
---------------------
You can question the risk posed by this astonishing expansion via minimizing
the significance of the "enormous notional value" of CDS, questioning the
real world economic risk they pose in actual transactions, but I think this
expansion is quite alarming given the facts of the nature of CDS.

As to why CDS have become such a serious threat to the global economy, the
two sources below offer analysis that is interesting, mostly beyond my
limited knowledge on this subject, but it seems to me quite different or at
least far more fleshed out than the analysis the "Off List" respondent
offered:

http://www.atimes.com/atimes/Global_Economy/KC04Dj02.html

*THE BEAR'S LAIR
One casino too many
*By Martin Hutchinson

Author bio:

http://www.greatconservatives.com/homepage/authorbio.html

*---------------------------*
http://online.wsj.com/article/SB123785310594719693.html

 One Way to Stop Bear Raids Credit default swaps need much stricter
regulation.
 By GEORGE SOROS<http://online.wsj.com/search/search_center.html?KEYWORDS=GEORGE+SOROS&ARTICLESEARCHQUERY_PARSER=bylineAND>
-------------------------------
On 4/18/09, Ted Moffett <starbliss at gmail.com> wrote:


> 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.*
>
> ------------
>
> Vision2020 Post: Ted Moffett
>
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