Thursday, April 8, 2010



The danger is that, if one buys and trades too much derivatives, they will fluctuate all over the place, as markets tend to do. But, because a small variation of the derivative of a security corresponds to a huge variation of the security itself, varying the former significantly, one will guess, corresponds to enormous variations of the later.

When the value of crude oil rocketed towards $150 per barrel, there was a controversy about whether the futures (of oil) dragged the value of oil itself with them. Nobel laureate Krugman claimed he did not see the relationship. But it exists. In two ways. First, the futures indicate what the price will be, so, if the price of the future of f goes up, people who trade f will expect f to go up, so they will hold back, making f go up more (from "less offer, same demand, higher price").

Secondly, and more importantly, suppose someone wants to invest in the "oil sector". They have the choice between three possibilities: investing in oil itself, investing in oil companies, and, finally, investing in oil derivatives.

Suppose they invest in the later. Per the nature of derivatives, they get huge leverage, so little money gives a big effect. So it is much easier to drag up the price of oil in this indirect manner, and amplify other investments they made (if any) in the sector. The devil is in the details, so, I will advocate, to cut the devil out, take the details out first, especially those hidden in the Shadow.

To make matters worse, that money they invest in the derivatives is as much money that will not be invested durably in the real economy (namely, oil companies, and oil itself). Instead it is fast, Brownian motion money, supposed to work like Maxwell’s demon.


Most of an influential bank’s balance sheet (like 97%) is made of ‘SHADOW BANKING". That is what has to be brought in the light, and then eradicated.

Indeed, what do big banks officially do? Shelter deposits, and invest in the real economy. But what do really influential banks really do, in the West? Mostly? Well, they invest, but not in the real economy. Instead, they invest in Shadow Banking.

Leverage in Shadow Banking through derivatives such as Credit Default Swaps transformed a housing correction, into the instantaneous annihilation of perhaps dozens of trillions of dollars, worldwide, dwarfing world GDP.

Why? Let’s consider an example. JP Morgan, led by (officially named thus) "co-conspirator" Jamie Dimon, has an 80 trillion dollars derivatives portfolio. His colleagues from big, influential banks were, and are, in similar positions.

These positions in the derivative universe dwarf completely the big influential banks’ real world investments. For example Citigroup claimed to have assets of 1.7 trillion dollars, or so, throughout the 2007-2009 crisis. This was part of Citigroup’s official balance sheet, in the real world. So why did Citigroup fail?

Because most of the balance sheet of Citigroup was in derivatives, and it was so by roughly two orders of magnitude, namely about 100 times more. But big influential banks use big, influential semantics made to hide their real situations, words such as off balance inventory, shadow banking, notional valuations, etc. When it is convenient to them, they incorporate these investments in describing themselves, and, when it’s not convenient, they don’t.

Big, influential banks have mostly investments in a shadow universe, which are leveraged onto the real world. They are made to allow the banks to claim great profits in the netherworld (thus justifying real bonuses, in the real world).

Hence banks, in the present system, are allowed to divert immense capital, most of existing world capital, to the netherworld (they will say, it ain’t real, except when bonus time, and the time to claim profits, come around). Thus, they starve the real economy. The netherworld investments dwarf the real world investment by a factor of ten (roughly: it’s all so secretive, we don’t know the exact quotient).

As I said before, part of the way out is just to remove the ability of private banks to use leverage insured by the State. Instead, let them just eat what they kill, without the regalian privilege of State insured leverage, and without the regalian privilege of using government money as seed capital.

Regalian leverage, and regalian capital, should be used only by the rex, the king, namely, the State. Render to Caesar what belongs to Caesar, as the other one supposedly said.


Money creation is regalian, give it back to the ultimate authority, the State.

We need a monetary authority that is focused on the best policies for our planetary economy. This cannot be a central bank such as the US Federal Reserve: this one is infeodated to the private banks, in the mental state where they think they are the kings. Federal Reserve independence means mostly INDEPENDENCE FROM DEMOCRACY (enormous secret support from the Fed to the very bad actors was revealed recently, as I said above).

Other central banks are differently constructed: the ECB is different from the Fed.

Thus solution to private banking as rulers of the world, the way we have it today: all private banks should have zero leverage, and they would be able to invest their deposits, nothing more.

The national banks would be the only one allowed to use leverage, and thus create money, through debt. Bankers would be civil servants, but investment directors, and their helpers, would get bonuses, according to the long term profitability of the projects they invest in. No more giving money to friends, politicians, and themselves.

Only derivatives with a direct commercial interest, would be preserved. Others, and all Shadow Banking, would be unlawful. National investment directors would be allowed to invest in lawful derivatives, with smaller leverage than the commercial operators themselves.

Time to cut through the plutocracy, and cut all the heads of this hydra at once. We, People of the earth, technological and scientific progress, the cause of peace and sustainability, we all need a lot of capital. That capital is in the Shadow Banking universe, let’s go get it! We need it, they don’t!

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