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Warnings of a Derivatives Blowout in 2013

Dec. 26, 2012 (EIRNS)—Readers of EIR are already well aware that absolutely nothing has been done to cure the rottenness of the global financial system over the past 5 years—and that, with the trillions of dollars of bailout, the bankruptcy crisis has only gotten worse. What's new is that a number of prominent institutions and individuals have come forward at year-end to warn that a blow-out of the system is an immediate, clear-and-present danger.

Most direct was Paul Craig Roberts, a former Assistant Secretary of the US Treasury under President Reagan and former Associate Editor of the Wall Street Journal, who on Dec. 17 issued an article titled "The Derivatives Tsunami and the Dollar Bubble—The Fiscal Cliff is a Diversion," contrasting the insane "fiscal cliff" debate over how to impose austerity on a dying economy, to the actual problem, the derivatives bubble. This article was one of a series of warnings, including an interview given Dec. 11, which he entitles, on his website, "America is Going to Crash Big Time."

In the "Tsunami" article, Roberts notes that 95% of the $230 trillion in U.S. derivative exposure is held by the biggest four Wall Street banks, and adds:

"Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivatives—a joint achievement of the Clinton administration and the Republican Party—Chase, Bank of America, and Citibank were commercial banks that took depositors' deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves. With the repeal of Glass-Steagall these honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors' money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities....

"The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the U.S. financial system. Today merely four U.S. banks have derivative exposure equal to 3.3 times world Gross Domestic Product. When I was a U.S. Treasury official, such a possibility would have been considered beyond science fiction....

"The hyped threat of the fiscal cliff is immaterial compared to the threat of the derivatives overhang and the threat to the U.S. dollar and bond market of the Federal Reserves commitment to save four US banks."

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