Monday, January 21, 2013

Pop will go the Weasels

Surprise:  The Fed is inflating another massive derivative bubble - this one betting directly on....what Big Ben Bernanke's latest wheeze will be.  Be afraid, be very afraid.  More here.

Today we are witnessing an increasingly divisive tension between high-profit activities conducted at trading desks for big money-center banks and next-to-nothing returns offered to average savings account holders. The Fed’s aggressive liquidity injections are showing up as asset bubbles in sophisticated global financial markets even as domestic consumer price indices show only modest increases; this two-tier effect favors “whales” who can wager millions on exotic credit instruments while stiffing modest savers with negative real returns.

According to the latest semi-annual report issued by the Bank for International Settlements, the gross market value of outstanding over-the-counter derivatives is $25.4 trillion​—​yes, trillion​—​with 75 percent of the contracts linked to interest rates: forward rate agreements, swaps, options. In June 2008, shortly before the crash, the gross market value of outstanding OTC derivatives was $20.4 trillion, with 46 percent linked to interest rates.

So what has actually changed since the pre-crisis financial situation? Instead of tamping down speculative betting on interest rates in favor of rational market pricing of loanable funds, the Fed’s monetary policies are stimulating it. No wonder traditional financial intermediation​—​the kind that used to channel depositor funds toward promising new businesses​—​is now oriented toward gaming various hunches about the Fed’s next move. Even smaller banks are learning to churn their Treasury holdings rather than make loans to private-sector borrowers​—​especially since federal regulators are evaluating their portfolios.

The problem is that there is nothing to be done except wait for the crash.  God help the poor and weak.

No comments:

Post a Comment