Janet Tavakoli: Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold

34 posts / 0 new
Last post
Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Janet Tavakoli: Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold

Video is in link. 

Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold

Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these "financial weapons of mass destruction" levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull's-eye.

READ IT!

http://www.marketoracle.co.uk/Article17744.html

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3157
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Morpheus

This is an astonishing interview.  I'm surprised no one else has commented.  It's the financial empire analogy to Harry Markopolos and Bernie Madoff.  The  SEC and the financial establishment were warned a decade and more ago.  As Markopolos said, if he was made SEC chairman he would first fire everyone.  They are incompetent to the point of criminality.  And yet, the bad guys are in charge.

Doug

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

I'm really disappointed that you guys are taking this drivel seriously. Tavakoli's specious arguments defy logic or reason. I didn't bother watching the interview, because the text of the article preceding it was such nonsense I knew it would be a waste of my time.

AIG got in big trouble because they were a party to CDS contracts. The U.S. Government is not. The analogy she draws is therefore specious and misleading. It certainly makes sense to prohibit entities that are beneficiaries of government bailouts from being parties to CDS, and government money should never be used to bail out those who get themselves in deep doo doo as was the case with AIG. But speculators are not the problem; they're just the most convenient scapegoat.

Here's a good interview featuring someone with a functioning brain who points out that CDS contracts can only exist when two parties enter them: http://www.zerohedge.com/article/columbia-prof-who-called-argentina-cris.... Jim Rogers also explained this in a recent interview when he pointed out that if gold is found in the ground and speculators rush in with investment capital to build gold mines, that doesn't mean the speculators caused the gold to exist. The speculators are reacting to situations not of their own making, and that is the situation with CDS on greek sovereign debt. The speculators didn't run up a 13% deficit against GDP after signing a treaty promising not to exceed 3%. The Greek government did that. All the speculators did was notice the opportunity to profit not at the expense of the Greek Government or the Greek people, but at the expense of the counter-parties selling them CDS and nobody else, by speculating on a default. There is no intelligent reason for anyone to object to this unless one of the parties to the CDS contracts in question is a government or government-subsidised entity. If you must have an emotional reaction and demand that something be banned, then ban Goldman Sachs from teaching governments how to hide their true financial condition from their people and the other countries they sign treaties with.

All of the nonsense flying around in European politics about banning short selling or CDS is very obviously nothing more than political scapegoating, trying to distract attention from the true guilty party (the government that violated its Maastricht treaty decifit cap by more than 420%). They are trying to manipulate the financial naivity of the general public by blaming "speculators" who had absolutely nothing to do with causing the problem. The problem was caused by the very people who are so anxious to put the blame on speculators. This sort of manipulation of public sentiment to assign blame to an innocent scapegoat is not unexpected. But I'm rather disappointed that regulars on this site who really ought to know better are falling for it. Come on, guys, pay attention!

Banning capitalism because socialists have in recent history been stupid enough to socialize losses of parties they allowed to privatize gains is just plain stupid. Stop taking the bait from the politicians and understand the issue before you try to blame speculators or the CDS derivative mechanism for a problem that has nothing to do with them.

Erik

 

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3157
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Erik

It was my understanding that our economic system nearly collapsed a while back at least partially because our financial institutions had wildly speculated on these derivative instruments.  One can argue whether the government should have bailed them out, but there don't seem to be many people who argue that the system would not have collapsed without the bail outs.  I don't care how irresponsible individuals or entities are in their gambling habits, until it threatens our economic well-being.  Then someone has to step in, and government appears to be the only power capable of doing so.  Unfortunately, it stepped in after the fact instead of before they nearly gambled us into the dirt.

Even if the government had nothing to do with the derivatives market, it is our economy that was at risk and would surely have created enormous hardship, and may still, in the absence of government intervention.  Our only hope is that they can engineer a soft landing instead of a crash.  I am not optimistic on that score, but we must concede we haven't had a crash yet.  Without sounding too "Socialist", it should be noted that even hard core libertarians concede that it is a legitimate government function to protect the market place from what is frequently its own folly.  Given that understanding, what is the argument for not regulating the derivatives market, not to mention not controlling corporate size so that we never again have "too big to fail" financial empires?  Even Greenspan conceded that this totally "free market" failed miserably in regulating itself.

Doug

land2341's picture
land2341
Status: Gold Member (Offline)
Joined: Aug 20 2009
Posts: 402
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

To indicate that speculators don't distort markets is absurd.  There is the realistic process of entering into an agreement to own a piece of a company that is speculative knowing that you may or may  not succeed;  and then there is being able to bet shares you don't own and to bet against a share,  or a country.  CDS are rank bets.  Gambling in the highest order by the people who control the house......  This is not scapegoating or a specious argument,  it is the truth.  The stock market is supposed to create wealth by allowing people to own shares in a company.  Allowing people to place bets on currencies distorts the value of the currency,  therefore it does endanger the country that lives and dies by the value of that currency.   CDS' by there very nature remove the gambler from the market process and encourages bad debt by people who should know better but clearly do not. 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
land2341 wrote:

To indicate that speculators don't distort markets is absurd.  There is the realistic process of entering into an agreement to own a piece of a company that is speculative knowing that you may or may  not succeed;  and then there is being able to bet shares you don't own and to bet against a share,  or a country.  CDS are rank bets.  Gambling in the highest order by the people who control the house......  This is not scapegoating or a specious argument,  it is the truth.

Can you please explain the real difference between speculation and investing because I am not seeing much of a difference?

land2341 wrote:

The stock market is supposed to create wealth by allowing people to own shares in a company.  Allowing people to place bets on currencies distorts the value of the currency,  therefore it does endanger the country that lives and dies by the value of that currency.   CDS' by there very nature remove the gambler from the market process and encourages bad debt by people who should know better but clearly do not. 

How do you "create wealth" by allowing people to own shares in a company?  How does betting on the outcome of something distort its value?  It seems to me it would aid in price discovery and therefore add value to other people that are entering into that transaction.

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
Doug wrote:

Even Greenspan conceded that this totally "free market" failed miserably in regulating itself.

Which "totally" free market was that?  Are we talking about the one with a private central bank and private commercial banks in complete control of the money supply?  The one where the market was considered to have the "Greenspan Put"?  The one where contracts could be negated or rewritten at will?  Is this the "totally" free market he was talking about?

that1guy's picture
that1guy
Status: Gold Member (Offline)
Joined: Jan 11 2009
Posts: 333
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
ErikTownsend wrote:

I'm really disappointed that you guys are taking this drivel seriously. Tavakoli's specious arguments defy logic or reason. I didn't bother watching the interview, because the text of the article preceding it was such nonsense I knew it would be a waste of my time.

AIG got in big trouble because they were a party to CDS contracts. The U.S. Government is not. The analogy she draws is therefore specious and misleading. It certainly makes sense to prohibit entities that are beneficiaries of government bailouts from being parties to CDS, and government money should never be used to bail out those who get themselves in deep doo doo as was the case with AIG. But speculators are not the problem; they're just the most convenient scapegoat.

Here's a good interview featuring someone with a functioning brain who points out that CDS contracts can only exist when two parties enter them: http://www.zerohedge.com/article/columbia-prof-who-called-argentina-cris.... Jim Rogers also explained this in a recent interview when he pointed out that if gold is found in the ground and speculators rush in with investment capital to build gold mines, that doesn't mean the speculators caused the gold to exist. The speculators are reacting to situations not of their own making, and that is the situation with CDS on greek sovereign debt. The speculators didn't run up a 13% deficit against GDP after signing a treaty promising not to exceed 3%. The Greek government did that. All the speculators did was notice the opportunity to profit not at the expense of the Greek Government or the Greek people, but at the expense of the counter-parties selling them CDS and nobody else, by speculating on a default. There is no intelligent reason for anyone to object to this unless one of the parties to the CDS contracts in question is a government or government-subsidised entity. If you must have an emotional reaction and demand that something be banned, then ban Goldman Sachs from teaching governments how to hide their true financial condition from their people and the other countries they sign treaties with.

All of the nonsense flying around in European politics about banning short selling or CDS is very obviously nothing more than political scapegoating, trying to distract attention from the true guilty party (the government that violated its Maastricht treaty decifit cap by more than 420%). They are trying to manipulate the financial naivity of the general public by blaming "speculators" who had absolutely nothing to do with causing the problem. The problem was caused by the very people who are so anxious to put the blame on speculators. This sort of manipulation of public sentiment to assign blame to an innocent scapegoat is not unexpected. But I'm rather disappointed that regulars on this site who really ought to know better are falling for it. Come on, guys, pay attention!

Banning capitalism because socialists have in recent history been stupid enough to socialize losses of parties they allowed to privatize gains is just plain stupid. Stop taking the bait from the politicians and understand the issue before you try to blame speculators or the CDS derivative mechanism for a problem that has nothing to do with them.

Erik

 

 

Just had to say, well said. I could not have said any of it any better my self. The entire idea is silly, though i like the thought of banning Goldman Sachs, LOL

 

Mike

land2341's picture
land2341
Status: Gold Member (Offline)
Joined: Aug 20 2009
Posts: 402
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Investing in a firm gives the firm capital with which to grow its business.  Even buying the stock after it is on the market gives the firm value which allows it to grow.  Speculating on a firm usually does not involve any of the money in the speculative trades to go anywhere near the company or commodity that is being traded.  For a while there, the largest oil company in the world was Morgan Stanley....  they did not want the oil,  they did not sell it, drill it, or refine it  they merely traded it over and over during the shipment process thereby severely elevating the price.  This made gasoline prices go up and cost those involved in oil drilling and refining to actually lose out.  (Hard to feel too much sympathy I know,  but it did mess with the commodity price as many refiners had locked in prices, as did airlines....  it was not supply that drove the price up like crazy it was commodities traders.)

When I invest in a  firm and give it my capital I create wealth both for me and the firm as well as its employees and suppliers etc...  If the firm does well I win,  if it does not I lose.  Shorting a stock is a bet that the stock will go down often by using shares you do not actually own.  It still stuns me that this is legal.  To short a stock when you own enough of that stock to cause its crash by putting it all on the market should be illegal but it is done all the time.  Creates wealth only for the trader and can drive a business into the ground....  Then there is micro-trades.  You "buy" a share or put in your buy order.  Between your broker placing your buy order and the exchange selling you the stock there are other firms that do microtrades or intercept trades.  They snatch the share for the two to three seconds it takes for the buy to go through.  They usually only make pennies per share,  but by doing this millions of times a day it become lucrative pretty quickly.

And alot of this is circle jerks sometimes trades between traders who sit next to each other buying and selling up the shares until they can short it and dump it.  The activity on a trade like that can have severe negative consequences for a business that has not done anything whatsoever different from Monday to Friday and finds itself with a soaring stock price and then a crash......

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3157
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

goes211

Quote:

Which "totally" free market was that?  Are we talking about the one with a private central bank and private commercial banks in complete control of the money supply?  The one where the market was considered to have the "Greenspan Put"?  The one where contracts could be negated or rewritten at will?  Is this the "totally" free market he was talking about?

I meant the otc derivatives market that was quite specifically exempted for any and all regulation.

http://en.wikipedia.org/wiki/Derivative_(finance)

Quote:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008).[4] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
Doug wrote:

goes211

Quote:

Which "totally" free market was that?  Are we talking about the one with a private central bank and private commercial banks in complete control of the money supply?  The one where the market was considered to have the "Greenspan Put"?  The one where contracts could be negated or rewritten at will?  Is this the "totally" free market he was talking about?

I meant the otc derivatives market that was quite specifically exempted for any and all regulation.

http://en.wikipedia.org/wiki/Derivative_(finance)

Quote:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008).[4] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

How could the OTC market ever self regulate if the only time it got into any real trouble, it got bailed out?  Everybody loves the creative part of the free market but it seems the destructive part is widely criticised.  Unfortunately you can't get one without the other and I would argue you really would not want it any other way.  The destructive side was not allowed to fix this problem because the firms that should have been destroyed, were propped up at our expense.  They should have allowed EVERY firm that took too much risk to go into receivership.  There were other firms that were not leveraged up that could have survived and thrived in the aftermath.

The problem with the bailout is that it cost us the best opportunity to punish those that actually caused the problems and fix the underlying issues.  I think the average man on the street would have been far more accepting of economic hardship if they would have known that the fat cats also got wipped out.  As it is now, the average worker is slowly being screwed while those that took too much risk are back to living large.

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
land2341 wrote:

Even buying the stock after it is on the market gives the firm value which allows it to grow. 

Buying stock in the secondary market gives no money to the company and is completely speculative.  Many stocks don't even pay dividends, so what exacly are you "investing" in?  Face it.  The difference between speculating, gambling, and investing is all in the eye of the beholder.

land2341 wrote:

When I invest in a  firm and give it my capital I create wealth both for me and the firm as well as its employees and suppliers etc...  If the firm does well I win,  if it does not I lose.  

That certainly sounds speculative to me.

land2341 wrote:

Shorting a stock is a bet that the stock will go down often by using shares you do not actually own.  It still stuns me that this is legal.  To short a stock when you own enough of that stock to cause its crash by putting it all on the market should be illegal but it is done all the time.  Creates wealth only for the trader and can drive a business into the ground....  

Non-naked short selling requires you to locate shares ahead of time and then pay the share owners for that privilege.  This is a legitimate market tool and I see nothing illegal or fraudulent about these transactions.  Naked shorting is complete fraud and should be prosecuted as theft.  That the SEC does not crack down on failures to deliver only goes to show how corrupt or incompetent government regulators really are.

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

The article isn't "blaming speculators."  It is pointing out the need to fix the biggest fraudulent hostile takeover in history.

I'm shocked to see some still trying to defend our indefensible currency/derivative markets.  Almost every country in the world is, like Greece, hanging over a precipice on the verge of being dropped into the feeding frenzy.  We have a global monetary system that subjugates our governments to exponentially growing debt.  By definition then insurance on that debt that is worth many times more than the underlying asset is a total fraud.  Almost all money in the world is debt, so how could there be added reserves somewhere that can cover losses on it?  I know financial engineers from Harvard and Chicago using the false assumptions of neoclassical economics have made these instruments appear to be insurance, but Ivy League BS is still BS.  I'm sure Mars doesn't have asset money either so where do derivative traders think the extra money pool is sitting that is going to pay them?  Truth is, they know they can't be paid unless governments agree to steal from the masses and transfer their wealth to them.  In fact, these instruments are just being used by the people who employ the traders as senior claims on all productive capacity in a country, which means they are massive ownership contracts covering entire countries.  Luckily Iceland has woken up...they don't want to be owned.  It appears the US does. It's about to start in the US with Illinois and California.  The states will be picked off first, then at some point down the road, the government of the greatest country in history will be foreclosed because it failed to defend its sovereignty.

Sure, it's not the speculators' fault.  They're just sharks showing up at the feeding frenzy.  I suppose they can claim amorality on the issue.  They have their blinders on just doing what they're paid to do like any good racehorse...whatever makes the wage stub go up is justified.  The problem is the basis of the world's monetary system.  It should not be a gambling house on the horse race, but that's what it is.

Blaming government is exactly what the money lords want us to do.  We will hang our politicians and then look to the financiers for a solution once our countries are foreclosed upon as is happening to Greece now.  I guess the human species never learns.  Global currency, bank, government is around the corner.

 

 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Doug, strabes, land, or anyone else who's still confused about the real issue here:

Please explain to me how the speculators forced the Greek government to exceed its 3% deficit cap by more than 400%. Somehow I missed how they did that.

Thanks,

Erik

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
strabes wrote:

The article isn't "blaming speculators."  It is pointing out the need to fix the biggest fraudulent hostile takeover in history.

Strabes,

The talk about speculators is not from the article but merely a response to land2341's comments. 

strabes wrote:

I'm shocked to see some still trying to defend our indefensible currency/derivative markets.  Almost every country in the world is, like Greece, hanging over a precipice on the verge of being dropped into the feeding frenzy.  We have a global monetary system that subjugates our governments to exponentially growing debt.  By definition then insurance on that debt that is worth many times more than the underlying asset is a total fraud.  Almost all money in the world is debt, so how could there be added reserves somewhere that can cover losses on it?  I know financial engineers from Harvard and Chicago using the false assumptions of neoclassical economics have made these instruments appear to be insurance, but Ivy League BS is still BS.  I'm sure Mars doesn't have asset money either so where do derivative traders think the extra money pool is sitting that is going to pay them?  Truth is, they know they can't be paid unless governments agree to steal from the masses and transfer their wealth to them.  In fact, these instruments are just being used by the people who employ the traders as senior claims on all productive capacity in a country, which means they are massive ownership contracts covering entire countries.  Luckily Iceland has woken up...they don't want to be owned.  It appears the US does. It's about to start in the US with Illinois and California.  The states will be picked off first, then at some point down the road, the government of the greatest country in history will be foreclosed because it failed to defend its sovereignty.

I don't feel sorry for governments that are on the brink and are now blaming speculators for their problems.  If anything, we would have all been better off if these speculators would have attacked sooner so that this fiscal bubble would not have gotten so large.  Now the system is in real trouble and there is no painless way out and no way it can be put off indefinately.

strabes wrote:

Sure, it's not the speculators' fault.  They're just sharks showing up at the feeding frenzy.  I suppose they can claim amorality on the issue.  They have their blinders on just doing what they're paid to do like any good racehorse...whatever makes the wage stub go up is justified.  The problem is the basis of the world's monetary system.  It should not be a gambling house on the horse race, but that's what it is.

Blaming government is exactly what the money lords want us to do.  We will hang our politicians and then look to the financiers for a solution once our countries are foreclosed upon as is happening to Greece now.  I guess the human species never learns.  Global currency, bank, government is around the corner.

I agree it is not the speculators fault and that the monetary system is to blame, however I don't consider government quite so blameless for this problem.  After all they are the ones that allow the current monetary system to continue.  If they can not be blamed, who really can?

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
ErikTownsend wrote:

Doug, strabes, land, or anyone else who's still confused about the real issue here:

Please explain to me how the speculators forced the Greek government to exceed its 3% deficit cap by more than 400%. Somehow I missed how they did that.

Thanks,

Erik

exactly!

rickets's picture
rickets
Status: Silver Member (Offline)
Joined: Jun 8 2009
Posts: 238
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

I love these debates.  I love the scapegoats. 

The world got caught up in the Junior High thought:  "But mom, everyone else has an SUV and a big home, why cant I?"  And, you know what, we forgot what our mommies taught us and decided to go buy em.  95% of the world stretched and stretched and stretched.  Oil companies extended operations and profits exponentially too (evil energy sector workers), governments extended the services (evil firement, evil cops), teachers got bigger and bigger union contracts (evil unions, evil teachers), people bought more than one house and flipped it on leverage (evil home flipping home derivitive traders/speculators/investors), restaurants abused the people by providing more expensive wine and bigger mark ups (evil restaurant owners abusing mark ups on wine - how dare they charge for something that harms you!), the lazy man pushed for more and more welfare and we gave it cause money was everywhere....and on and on and on.  NO sector in society was innocent.  We all abused and leveraged and wanted more more more.

Our society is filled with greedy filthy consumer pigs.  95% of us are to blame....maybe 90% on this site.  Stop the madness - we are all paying the price for everyone getting punch drunk.  Derivitives, speculation - - these are wall st words but exist in EVERY industry in the world, and were used and leveraged in every industry in the world. Oil, churches, govts, unions, day care centers, grocery stores - THEY ALL HEDGE THEIR RISKS - THEY ALL OVERLEVERAGED - THEY ALL GOT WAY TOO MUCH NICE STUFF!!!

After seeing the evidence around us EVERYWHERE - right next door and down the street and at every one of our jobs - - how can we still be fooled by the wall st scapegoat crap?  99% of those on wall st simply acted to provide what you me and your mother asked for, marked it up, and sold it under legal contracts.  Everyone was doing it, and therefore by the masses standards it was not only ethical but legal.

Please dont respond with comments about me defending the fed, or money created with debt....thats not the point.  The point is derivitives, trading, stocks, bonds - - all were no more a cause to this fiasco than the teacher unions, individuals' greed, youre mountain vacation home, your 3rd vacation out of the country in a year, your habit of going to restaurants 6 times a month, your 3rd car, 200 dollar jeans......

We all gave each other what we wanted, marked it up, and sold sold sold us all down the river.

SteveW's picture
SteveW
Status: Gold Member (Offline)
Joined: Jan 21 2010
Posts: 490
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
ErikTownsend wrote:

Doug, strabes, land, or anyone else who's still confused about the real issue here:

Please explain to me how the speculators forced the Greek government to exceed its 3% deficit cap by more than 400%. Somehow I missed how they did that.

Erik, there's no need to be so disingenuous with your straw man question.

I think we all accept that money is debt. Since it carries compound interest there is a huge exponentially growing level of global debt. Increasing government debt makes it harder for governments to service the debt.

Now I don't recall strabes stating that speculators caused the Greek government to exceed its 3% deficit cap, but at any time there is always a low man on the totem pole, so to speak. Last year it was Iceland, then Dubai, this year it starts in Greece. The sharks have already killed the big corporate fish, Bear-Sterns, Lehman Brothers, AIG etc. so that with their bailout money and US backstop they can go against sovereign entities. Now not being party to the existing CDS obligations that Greece has I don't know specifically how they can be squeezed on these but you can be sure that these contracts have clauses that benefit only the sellers and not the buyer. I believe the original CDS's involved the Euro/Yen so the recent worsening spread could trigger collateral payments. Now if you know this spread will tend worsen the Greek situation you can buy CDS "insurance" on Greek default (even though you don't own the debt) and then try to collect by lighting the fire of manipulating the Euro/Yen spread.

So what I'm saying is that in the current global situation if it wasn't Greece it would be some other mark. I'm sure strabes can deal with it much better than me when he stops by.

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
erik wrote:

Please explain to me how the speculators forced the Greek government to exceed its 3% deficit cap by more than 400%.

I didn't blame the speculators.

But I also do not so graciously say the speculators are pure as snow.  For some reason what occurs on the level of capital markets with an air of legitimacy would be considered outrageous if it occurred at the microeconomic level.  If a group of punks raided your fridge and took your food leaving you hungry, saying "hey it's not my fault, he left the door unlocked with a sign inviting us in," no doubt people would be enraged.  Yet when Soros does the same at the macro level raiding a country's currency and leaving the people hungry because the "door is unlocked" (the currencies are floating debt instruments), he's lawded by the investment class.  There is a reason governments make it illegal to raid someone's fridge.  They should make it illegal to raid a currency as well by making them sovereign rather than letting them continue as debt instruments.  It's clear today that Friedman's idea that currencies should float is absurd. Currencies are the basis of the people's quality of life.  They should not be the object of a casino game for billionaires.  Countries had better start locking the door to protect their lower class populations as this article calls for so punks can't keep raiding the fridge.  Otherwise the rest of the world which has yet to be attacked will go down just like Greece (and Iceland, Indonesia, Malaysia, Thailand, Mexico, Argentina, England......).  It's just a matter of time.  The 1st E says so.

goes wrote:

If they can not be blamed, who really can?

True, but let's be precise and blame them for not fixing the monetary system rather than blaming them for increasing the public debt.  The latter is a necessary requirement, a symptom of the former. 

 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
strabes wrote:
erik wrote:

Please explain to me how the speculators forced the Greek government to exceed its 3% deficit cap by more than 400%.

I didn't blame the speculators.

But I also do not so graciously say the speculators are pure as snow.  For some reason what occurs on the level of capital markets with an air of legitimacy would be considered outrageous if it occurred at the microeconomic level.  If a group of punks raided your fridge and took your food leaving you hungry, saying "hey it's not my fault, he left the door unlocked with a sign inviting us in," no doubt people would be enraged.  Yet when Soros does the same at the macro level raiding a country's currency and leaving the people hungry because the "door is unlocked" (the currencies are floating debt instruments), he's lawded by the investment class.  There is a reason governments make it illegal to raid someone's fridge.  They should make it illegal to raid a currency as well by making them sovereign rather than letting them continue as debt instruments.  It's clear today that Friedman's idea that currencies should float is absurd. Currencies are the basis of the people's quality of life.  They should not be the object of a casino game for billionaires.  Countries had better start locking the door to protect their lower class populations as this article calls for so punks can't keep raiding the fridge.  Otherwise the rest of the world which has yet to be attacked will go down just like Greece (and Iceland, Indonesia, Malaysia, Thailand, Mexico, Argentina, England......).  It's just a matter of time.  The 1st E says so.

I certainly would not consider the motives of speculators to be pure.  Clearly they are looking for a fast buck.  However, I don't really understand your equating what they are doing with theft?  It seems to me more like they are catching cheaters. I understand that the people of a country that just got rolled might be upset but they should really blame their leaders that control the system.  If the speculators did not attack, do you really think the system would go on forever?

Now things like what GS did with Greece, helping them cheat and then beting against them, is quite disgusting.  This seems to be a pattern with GS and is morally inexcusable.

strabes wrote:
goes wrote:

If they can not be blamed, who really can?

True, but let's be precise and blame them for not fixing the monetary system rather than blaming them for increasing the public debt.  The latter is a necessary requirement, a symptom of the former. 

I like to blame them for both but I agree that the current monetary system requres growth from somewhere or the whole thing will collapse.

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

I'm equating it with theft because the effect is the same.  What's the difference between someone stealing 50% of the dollars in your bank account vs. placing short pressure on your currency that knocks it down 50%? I know the 1st is illegal and the 2nd is legal, but what is the wealth difference to you?

What is theft after all?  It is a transfer of value from someone else to yourself.  That is precisely what these trades do.  Governments make that illegal at the micro level, but they leave the door completely open at the macro level. 

I suppose you can equate it with catching cheaters but 1) the cheaters don't suffer and 2) it ignores the millions of victims who do.  Can't ignore them any longer.  This is the civil rights issue of the 21st century.  If MLK were here he would be naming the "protectors of the status quo" who ignore the victims in order to justify their currency trading profits.  The system must be fixed.  People must be protected--supposedly the purpose of government.

The big speculators (Soros types) attack at the appropriate time when the big bankers are ready to propose a "fix."  They will attack the US dollar when the bankers are ready to put the global currency in effect.  THAT IS NO FIX!  WE SHOULD PREVENT THE ATTACK IN THE FIRST PLACE BY ISSUING SOVEREIGN MONEY WHILE PHASING OUT THE DEBT-BASED JUNK WE HAVE TODAY.

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

people arrogantly writing this woman off as someone without a "functioning brain" made me watch several of her interviews to see the truth.  turns out she's probably the smartest person I've seen in the major TV media on this issue.  if only a woman like this ran Treasury, a woman like Brooksley Born ran the SEC, and a guy like William Black ran the FDIC we might still have a country with a future.

 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Yikes! What a thread this has become...

FWIW, I never said that the CDS market was ok the way it is. I agree that it is seriously under-regulated, and I agree that this under-regulation played a big part in the financial disaster that resulted in the AIG bailout. The fact that even in the wake of AIG, it remains legal for public companies to hide their true financial condition from their investors, employees and regulators through off-balance sheet mechanisms is an outrage that I agree needs to be rectified. But frankly all of that is off-topic.

What I said is that I was disappointed that so many people are falling for the scapegoating of "speculators" as the cause of a problem when they are really merely a symptom. The problems facing greece were not caused by speculators, no matter how hard the Greek (and other) politicians try to insist they were. The root cause of the problem was an intentional agenda to defraud the citizens and the other EU nations. It was perpetrated by the Greek government and abetted by Goldman Sachs. That's the real issue. The speculators showed up as the problem began to unfold, hoping to make a quick buck.

The Tavaloki piece tries to make the argument that CDS played a key role in the failure of AIG, and that the evil CDS speculators could choose the U.S. government as their next victim. That is a ridiculously specious argument, for the simple reason that AIG was a party to an unservicable amount of CDS obligations, and the (entirely real) possibility that CDS speculators might speculate on a sovereign debt default is simply not an analagous scenario.

I stand by my original point: The people (notably Greek politicians) who are crying out publicly for a ban on CDS and short selling are doing so as an intentional tactic to distract attention from their own horrific failures, and redirecting public anger about the situation toward a convenient scapegoat so as to avoid taking the blame they themselves deserve. And it still seems to be working.

All the best,

Erik

Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
ErikTownsend wrote:

I'm really disappointed that you guys are taking this drivel seriously. Tavakoli's specious arguments defy logic or reason. I didn't bother watching the interview, because the text of the article preceding it was such nonsense I knew it would be a waste of my time.

AIG got in big trouble because they were a party to CDS contracts. The U.S. Government is not. The analogy she draws is therefore specious and misleading. It certainly makes sense to prohibit entities that are beneficiaries of government bailouts from being parties to CDS, and government money should never be used to bail out those who get themselves in deep doo doo as was the case with AIG. But speculators are not the problem; they're just the most convenient scapegoat.

Here's a good interview featuring someone with a functioning brain who points out that CDS contracts can only exist when two parties enter them: http://www.zerohedge.com/article/columbia-prof-who-called-argentina-cris.... Jim Rogers also explained this in a recent interview when he pointed out that if gold is found in the ground and speculators rush in with investment capital to build gold mines, that doesn't mean the speculators caused the gold to exist. The speculators are reacting to situations not of their own making, and that is the situation with CDS on greek sovereign debt. The speculators didn't run up a 13% deficit against GDP after signing a treaty promising not to exceed 3%. The Greek government did that. All the speculators did was notice the opportunity to profit not at the expense of the Greek Government or the Greek people, but at the expense of the counter-parties selling them CDS and nobody else, by speculating on a default. There is no intelligent reason for anyone to object to this unless one of the parties to the CDS contracts in question is a government or government-subsidised entity. If you must have an emotional reaction and demand that something be banned, then ban Goldman Sachs from teaching governments how to hide their true financial condition from their people and the other countries they sign treaties with.

All of the nonsense flying around in European politics about banning short selling or CDS is very obviously nothing more than political scapegoating, trying to distract attention from the true guilty party (the government that violated its Maastricht treaty decifit cap by more than 420%). They are trying to manipulate the financial naivity of the general public by blaming "speculators" who had absolutely nothing to do with causing the problem. The problem was caused by the very people who are so anxious to put the blame on speculators. This sort of manipulation of public sentiment to assign blame to an innocent scapegoat is not unexpected. But I'm rather disappointed that regulars on this site who really ought to know better are falling for it. Come on, guys, pay attention!

Banning capitalism because socialists have in recent history been stupid enough to socialize losses of parties they allowed to privatize gains is just plain stupid. Stop taking the bait from the politicians and understand the issue before you try to blame speculators or the CDS derivative mechanism for a problem that has nothing to do with them.

Erik

 

Erik. I think that you misunderstood the motive for my posting this. I am not in principle in favor of banning credit default swaps. I am in favor of regulating them. My motive was to air her statement claiming that creditors desire gold instead of euros. IF true, this is a huge revelation. 

No, the motive had nothing to do with the nature of CDS'. That's an entirely different topic. I'm afraid this thread came off the wheels immediately. :(

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

The sweet thing about nature is that no matter how bad things become, everything eventually works itself out.  I foresee the day when the bloated billionaires and other Wall Street/banking/political elite are lying on their sides, resting in the sun, with their bellies stuffed to overcapacity from stripping the carcass of civilization clean, unable to move in their torpid state, like a python after swallowing an oversized meal.  Then along come a myriad of little army ants who will, in turn, strip the fat cats' carcasses clean.  What goes around, comes around.

I can envision a future when fat cat "hunting" will become the new sport of choice among the proletariat, fully sanctioned by the new "government" (if you can call it that) and displacing in its appeal the mindless reality TV, celebrity watching, football, NASCAR, and other trivial mind mush.  After all what could be more entertaining to the masses than running to ground the very cause of the miserable state their existence has come to?   Sick, huh?  So's what they're doing to our world.  Retribution will be a b**** and there'll be no place on the globe to hide.    

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...
Morpheus wrote:

<snip>

I'm afraid this thread came off the wheels immediately. :(

Indeed, and I fear that was my fault. I have now taken the time to play most of the Tavakoli interview, and I agree that for the most part, she offers an intelligent explanation of credit derivatives that most anyone could understand. My hat is off to her for that.

I was probably feeling overly sensitive to the scapegoating issue because before reading this thread I had seen so many examples of speculator-bashing in the media that I'd had my fill. For the record, I do agree that speculators have caused some real problems, and I agree that regulatory shortcomings relating particularly to CDS were at the core of what allowed the 2008 financial crisis to happen. But that said, I think the press and a whole lot of supposed experts have said some pretty irresponsible and misleading things that have caused the public to blame speculators for failures that are really failures of government. To wit:

Janet Tavakoli wrote:

Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late.

This is completely misleading fear-mongering and in my opinion there is what amounts to an intellectual bait and switch when the reader is first reminded of the AIG crisis, then an implicit parallel is drawn to the U.S. Government. AIG got it trouble because it wrote far too much CDS with no real risk control or reserves to cover their obligations. The U.S. Government hasn't written any CDS, hence my comment about this being a specious argument.

There is nothing wrong with the existence of the credit default swap mechanism, nor is there anything wrong with the notion of a CDS contract payable in gold. If the underlying asset is sovereign currency, then it makes perfect sense to denominate the default payment in a currency-independent value store such as precious metals.

When two responsible parties want to engage in a credit default swap contract, there is inherently nothing wrong with that and there is no plausible justification for government to try to ban such contracts. What is reprehensible is that Goldman Sachs and others are running around teaching public companies and even sovereign states how to use these instruments to intentionally conceal their true financial condition. FASB is way behind here - the rules on reporting contingent liabilities should have been enhanced long ago to make it impossible to hide a company's real liabilities with "off balance sheet" instruments. But that's where the problem lies: Not in the existence of CDS, but in the lax regulation that allows companies to engage in deceptive accounting using CDS as their tool of choice to hide their real liabilities from those reading their financial statements. Banning CDS outright makes exactly as much sense as banning airplanes outright because of the way they were used on 9/11.

But what really bugs me is the way so many people are getting away with misdirective scapegoating tactics. The problems in Greece were caused by the Greek government's intentional fraud against their citizens and fellow EU member nations, which was aided and abetted by Goldman Sachs. That's the core issue, and the Greek government is guilty of fraudulent corruption and its senior officials should be prosecuted. Goldman should be investigated for their role in helping public companies and now sovereign governments to intentionally defeat generally accepted accounting practices and intentionally conceal their true financial condition. Those are the core issues and they warrant close attention on the world stage. Meanwhile, speculators have shown up and tried to make a buck exploiting the mess these people have made. It is true that in some but not all cases, the speculators may be engaging in tactics that worsen the problems that they had nothing to do with creating.

Here's an analogy: You have a multiple murder scene in broad daylight in the middle of mainstreet. Analogy: The mess created by the Greek (and several other) government(s) with the help of Goldman Sachs. In response to this, some reporters show up and in their frenzy to get as many bloody photos as they can for their tabloids, they screw up traffic and perhaps even get in the way of the police who are trying to contain the situation. Analogy: Speculators showing up to gamble on the outcome of the mess made by the Greek government.

What happens next? The people holding the smoking guns who just executed several people in cold blood start pointing their fingers at the reporters (speculators), demanding with outrage and vehemence in their voice, "Look! These reporters are in the way and screwing up law enforcement! They are responsible for these tragic deaths! Let's lynch them!!!".

There's just one problem with my analogy: If the multiple cold-blooded murders really happened, nobody would be stupid enough to fall for the tactic of the criminals trying to scapegoat the reporters. Reporters seem to most people to be good for society. But when the politicians blame "speculators", the very word triggers an emotional response that causes most people's critical reasoning faculties to short-circuit. And they are getting away with it. I won't be at all surprised if the reporters (speculators) are lynched in public ceremony while the murderers (politicians) take credit for "bringing the guilty party to justice".

Don't be naive and think this can't happen to you! Right now the focus on "evil speculators" is all about the hedge funds and i-banks. But as this situation worsens, don't be surprised when the political rhetoric comes out that "People who bought gold were betting against America, and deserve to have all their profits confiscated!" And those people on sites like this who are invested in ETFs like TBT (short U.S. long-bonds) are evil speculators who are attacking the financial security of the nation, and deserve to loose their entire investment else face treason charges. Yes, those are absurd statements that defy logic and common sense. But they are not one iota more outrageous than the way the Greek officials are scapegoating speculators for problems of their own making.

Pete (and everyone), my apologies if I took this thread off its intended tack. I really do think that some of Tavakoli's writing is grossly misinformed, misleading, and just plain wrong. But after watching most of the video, I do agree that on the whole she does a pretty good job of breaking these concepts down to layman's terms, which is certainly a service to society.

All the best,

Erik

 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Here's a timely article from ZH that echoes the scapegoating sentiment: http://www.zerohedge.com/article/european-commission-back-cds-trading-ba...

Erik

 

Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Erik you raise some good points, many of which I am in agreement with. But I still think some have missed my intention. 

What does it say about the Euro, or the Dollar, when counterparties to CDS' demand redemption in gold? Does it not suggest the fissures of a lack of faith in the fiat currencies? 

No apologies needed. You're not a thread-jacker. There were two big issues in this interview and you grabbed one of them. 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

Morph,

Honestly I don't see anything profound in the gold aspect. The fact that CDS on U.S. Treasuries is being traded in the first place certainly makes a very strong statement, i.e. the only reason you would buy CDS on treasuries is to hedge against a currency collapse level event, in which it would be natural to assume USD would be worthless. The issue of payment in gold is a reflection of the rather obvious issue that if the USD is worthless, the Euro probably is, too.

The real story in US Treasury CDS, in my mind, would be the question of what the trigger events are. Standard (and I use that term loosely) CDS contracts are triggered by non-payment or bankruptcy. I don't think either of those events are likely or worth trying to protect against. The much more likely "virtual default" scenario for US Treasuries would be a massive devaluation, such that repayment in notional terms does not meaningfully effect repayment in real terms. A standard-issue CDS contract would not protect against that.

So in other words, if CDS are being sold against U.S. Treasuries, one of two things is true: Either these contracts are triggered in a completely different way than conventional CDS, i.e. by a devaluation or dollar index threshold, or else they are in fact conventional CDS contracts triggered on a technical default, which says to me they are huge sucker bets being sold to ignorant buyers who haven't thought through how a U.S. sovereign debt crisis would really unfold. I don't discount the latter at all. People watch the CDS trading on other sovereign debts, figure it could happen here too, and buy CDS on U.S. Treasuries without stopping to think about how a U.S. "virutal default" would almost certainly come in the form of a technical non-default and nominal repayment with watered-down dollars. It's tempting to assume that institutional investors would never be stupid enough to fall for such a sucker bet, but they fell for subprime CDOs in droves so who knows?

If anyone has an actual copy of one of these U.S. Treasury CDS contracts, I'd love to see it!

Erik

 

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

I am sorry if I was the other threadjacker.  Like Eric, I shared the concern that the problems were being blamed on speculation.  I also was worried that statements like "counterparties to CDS' demand redemption in gold" were misleading.  The redemption specifications of CDS' are set at the time the contact is written so there is no way someone could after the fact demand payment in gold.  If what was meant was that new CDS contracts were not being written to settle in fiat and instead in physical commodities, then I agree that would be quite revealing to the markets setiment about fiat currencies.

DmaxSilver's picture
DmaxSilver
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 24
Re: Janet Tavakoli: Washington Must Ban U.S. Credit ...

"The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar."

 

OK, question;  Is it possible to know how many new contracts include 'payment in gold'? 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments