I’m interested in derivatives as a symbol of an economic system that’s NOT based on productivity that satisfies real human needs. Derivatives are contracts that shift risk from players who are risk averse (and want insurance against loss) to players who have an appetite for risk (and want a big gambling win).* While originally intended to serve much like an insurance policy, they have turned into a tool for high-stakes gambling that puts everyone else at risk.
The speculative market in financial derivatives is – depending on whose estimate you read – THREE to TWENTY (or more) times bigger than the whole global economy – way bigger than the GDP of the entire world. Derivatives are a very big part of what is called “the casino economy”. Financial speculation is basically gambling that the value of something – commodities, stocks, currency, whatever – will go up or down. The casino economy is not about producing or financing real goods or services.* It is about making lots of money for the successful gamblers.
The rest of us could let them go ahead and gamble except for two things. First, many of them use the money they get to buy more influence and power, making a mockery of “the free market” and “democratic self-governance”. Secondly, the wrong sequence of bad guesses, responses and glitches in this highly computerized money-making game could wipe out the global economy that the rest of us depend on. We are still stumbling from the last global financial crash in 2008 – in which derivatives played a major role. But far bigger crashes are possible.
The article below introduces us to this bizarre reality. If you find it interesting, I suggest looking at the original article online, which is filled with links and is followed by more than a dozen mainstream articles – from the New York Times, Wall Street Journal, San Francisco Chronicle, etc. – making the same points. If you’d like to start with some pretty amazing visuals illustrating the amounts of money involved, try
The main solutions – regulating the derivatives market and taxing speculative financial transactions – are fairly obvious but complex and (naturally) resisted by powerful interests. These solutions can only go into effect with massive public understanding and support. On the bright side, these solutions have some potentially very popular selling points – especially the tax, which would not only stabilize the speculative market but which – due to its gigantic size – would likely generate significant resources for creating healthy economies, societies and natural environments. (See
Supporters of such a tax make arguments like this: Do you want money to cut the national debt? Tax speculative financial transactions. Do you want funds to put the brakes on climate change? Tax speculative financial transactions. Do you want to make higher education and public health care free or wipe out poverty or AIDS? Tax speculative financial transactions. We’re talking hundreds of billions of dollars of government revenue here. Some advocates go as far as to note that – done right and combined with more effective taxes and fees on activities that harm people and the environment – a tax on financial speculation could replace the entire income tax system with no loss of government revenue.
Dealing with the speculative global casino involves the kind of issues – and possibilities – that most people don’t even know exist or don’t understand well enough to know what to do about them. After all, there are hundreds of important issues to attend to, enough to overwhelm anyone trying to be an informed citizen, especially if they have a family and/or a full-time job.
This is one of the main reasons I advocate citizen deliberative councils.
I suspect that most people reading this think that what I am writing here about derivatives makes a lot of sense. But what about the other side? There are many complicated arguments about this issue out there; some agree with my perspective and others don’t. For example, some suggest that even a small tax on speculation would result in far less speculation, which would wreck the big tax bonanza tax advocates imagine. The further we get into this – or any subject – the more complicated we often find it all to be. So how are we supposed to make up our minds intelligently and fairly – especially when we don’t have sufficient time to research it fully, don’t have informed but civil opponents to talk with about it, and don’t have the facilitation or mediation to help us all really hear each other and get beyond unproductive arguments so we can use our differences for greater understanding and possibility.
What would it be like to have citizen deliberative council – like the citizens juries, citizens assemblies, consensus conferences and creative insight councils that have been held hundreds of times around the world – make up for these lacks and give us an informed, thoughtful voice of We the People about a particular issue – such as how to handle derivatives – to consider along with all the partisan debates about it?
Heaven knows, it would certainly help me in my efforts to be a good citizen. That’s why I focus my work and citizenship on promoting that kind of democratic evolution. Such changes in the way we make our collective decisions would significantly improve what emerges from all our political and governmental activity. It might even make our country seem more wise than it does right now.
* Sometimes speculators are speculating about something that does relate directly to production. When a company issues stock, for example, it uses the money it gets selling the stock to develop its business. But when the stock is subsequently traded, it doesn’t finance production; it just makes or loses money for its traders. However, if the company is doing well – or speculators expect it to do well – speculation drives up the stock’s value, which increases the amount of money the company can get next time it issues more production-supporting stock. Likewise, some derivatives are arranged by producers like farmers to manage their risk: e.g., a farmer will negotiate with a miller to buy a certain amount grain at a future date for a particular price. The miller is betting that the contracted price will be lower than the market price (and thus a good deal for them). The farmer is trying to avoid the risk of the market price being too low to cover their production costs. But when speculators start just betting which way the price will go – even selling packages of mortgages and derivatives – things start to get really disconnected from productive realities.
Derivatives Market Bubble: Financial Derivatives Time Bomb
by Fred Burks
According to many top financial analysts and the revealing news articles below [see the original at the link above], the $700 trillion financial derivatives market may be a time bomb waiting to explode with catastrophic consequences. $700 trillion is more than 10 times the GDP of the entire world and equivalent to $100,000 for each of the 7 billion inhabitants of our planet. These financial instruments have a legitimate place in hedging risk, yet the recent explosion of growth in the global derivatives market has created a huge potential for massive instability.
According to the most recent report from the U.S. government’s Office of the Comptroller of the Currency (OCC), the total value of derivatives has increased approximately 1000% since 1996, and 250% since 2006 (see graph on page 12 of the OCC report). Derivatives continued their rapid climb even in the midst of the global recession that started in 2008. Most disturbing is the fact that 95% of all U.S. derivatives are monopolized by just five megabanks and their holding companies.
The below verbatim excerpts from major media and government reports speak for themselves. What they don’t mention is one simple measure which could greatly decrease the risk of the derivatives bubble bursting.
A simple tax of 0.25% (1/4 of 1%) on each speculative financial transaction would change the whole risky game. European citizens pay a value added tax (VAT) of 15% or more and most U.S. citizens pay a state sales tax of up to 13% on purchased goods. So why not add just a small tax on all speculative transactions? This would also net hundreds of billions of dollars in tax receipts, easing the growing world debt.
Thankfully, politicians are slowly becoming aware of the huge risk of the derivatives bubble and are taking steps in the right direction, but there is a long way still to go. And the financial speculation tax has yet to gain traction. By choosing to educate ourselves and spread the word on this vital issue, we can make a difference.
For concrete ideas on how you can play a part,
see the “What you can do” box below the
With best wishes for greater financial integrity,
Note: For those who would like a simple explanation and very brief history of derivatives, click here
For more on derivatives and their economic functions and risks, see
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