Quote:The fact is, derivatives have become the worlds biggest black market, exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in todays slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.
Recently Pimcos bond fund king Bill Gross said What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August. In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of Americas leaders cant figure out the worlds $516 trillion derivatives.
Why? Gross says we are creating a new shadow banking system. Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because theyre private contracts between two companies or institutions.
BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic shadow banking system that has become the worlds biggest black market.
Thats crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives dont. Theyre not real money. Theyre paper promises closer to Monopoly money than real U.S. dollars.
And it takes place outside normal business channels, out there in the free market. Thats the wonderful world of derivatives, and its creating a massive bubble that could soon implode.
Pretty interesting article, but that bolded sentence really made me laugh.