Timothy Geithner has an editorial out today in the WSJ. It’s pretty much total BS as you are no doubt suspected, but there is one thing that stuck out at me. Here’s the section:
“…banking regulators have outlined the major elements of reforms to bring oversight, transparency and greater stability to the $600 trillion derivatives market.“
Wait a second… how big? Are you telling me that derivatives exposure is 10 times world GDP?
I had heard Zero Hedge estimate it at 4 times world GDP and thought that was a total fabrication based on nothing. The whole article is full of lies, but did this one kernel of truth managed to slip by him? Not exactly.
In 2010, Geithner said, “The best that we can do for the American people is to put in place rules that will prevent firms from taking this risk again, make sure we protect the taxpayer, bring derivatives out of the dark — that’s what we can do.” But debts exceeding 10 times the entire world’s yearly product can never be repaid.
The NYT did note that derivative exposure was $600 trillion in 2010, but there’s been nothing to slow derivative growth since then. We have to assume, despite Geithner’s admission, that exposure is even larger than that.
Going back further, Newsweek also addressed the $600 trillion figure back in the early days of the crisis in October 2008. Here’s what they had to say:
“Saying there’s $668 trillion in derivatives floating out there is like saying every lottery ticket sold is worth the full value of the jackpot. If the jackpot is $100 million and lottery organizers sell 2 million tickets, ‘that’s $200 trillion worth of lottery wealth that’s circulating!’ jokes Figlewski. ‘When you say it that way, everybody knows that’s a complete nonsense number’…
With that growth comes the continued potential for a blow-up, in large part because there is no clearinghouse for trading in most kinds of derivatives. Such an institution would make trades and risk more transparent, which is why many government officials as well as experts like George Soros and Robert Reich are pushing for it. Until then, the $55 trillion question is whether controls can be put in place before the CDS market explodes, again.”
So perhaps $600 trillion, while accurate, isn’t as alarming as it seems, but this all depends on how effective Dodd Frank is at providing oversight on the industry, if its ever implemented, which we know the banks and Republicans are hard at work trying to stop.
