Time and again, we’ve been told that the
Great Crisis of 2008 has ended and that we’re in a recovery.
Indeed, earlier this year, we were even told by
Fed Chair Janet Yellen that the Fed may in fact raise interest rates
as early as next year.
If
this is in fact true, how does one explain the following statement
made by the Fed’s favorite Wall
Street Journal reporter,
Jon Hilsenrath?
One
worry: As they move toward a new system, trading in the fed funds
market could dry up and make the fed funds rate unstable. That
could unsettle $12 trillion worth of derivatives contracts called
interest rate swaps that are linked to the fed funds rate, posing
problems for people and institutions using these instruments to hedge
or trade.
So… the Fed may not be able to raise interest
rates because Wall Street has $12 trillion in derivatives that could
be affected?
Weren’t derivatives the very items that
caused the 2008 Crisis? And wasn’t the problem with derivatives
that they were totally unregulated and out of control?
And yet, here we find, that in point of fact,
all of us must continue to earn next to nothing on our savings
because if the Fed were to raise rates, it might blow up Wall Street
again…
Simply incredible and outrageous.
What’s
even more astounding is that Hilsenrath is in fact understating the
issue here. It’s true that there are $12 trillion worth of
derivatives contracts related to the fed funds rate… but total
interest rate derivatives contracts are in fact closer to $192
TRILLION.
And
that’s just the derivatives sitting on US commercial bank balance
sheets. We’re not even including international banks!
So…the US economy is allegedly in recovery…
the financial markets are fixed… and all is well in the world. But
the Fed cannot risk raising interest rates to normal levels because
Wall Street has over $12 trillion (more like over $100 trillion) in
derivatives contracts that could blow up.
That sure doesn’t sound like things were
fixed to us. If anything, it sounds like the stage is set for another
2008 type disaster.
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