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Public Action Committees (PACs) of America's big banks shelled out lucre to Congress members to be able to gamble on derivatives trading and have taxpayers pick up their losses. At midmonth, the House and Senate passed a trillion dollar federal budget. Secretly tucked into the bill was a provision written by lobbyists from Citigroup. It essentially repealed a provision of the Dodd-Frank Wall Street Reform Act that banned the big banks — Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase — from gambling on derivatives through subsidiaries backed by the Federal Deposit Insurance Corporation.

Many Congress members wanted to kill the entire bill to get this odious provision removed. In my opinion, if the big banks can do derivatives gambling knowing that if they lose, the government will bail them out (that's what's called "moral hazard"), another 2008/2009 financial crash is almost guaranteed. But the bill passed, and Wall Street is grinning.

According to MapLight, which traces gifts to politicians, San Diego County Representative Darrell Issa got $15,000 from the political action committees (PACs) of those big banks, and Representative Scott Peters got $11,500. Both voted to back the banks' gambling. Representative Juan Vargas of Chula Vista got $9,500 but voted against the bill.

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Comments

MichaelValentine Dec. 18, 2014 @ 2:12 p.m.

Corporate sponsored political parties.

Is it any wonder that we are in the mess we find ourselves? And to think, Congress, the lower house, used to be called the people's lobby. What a hoot.

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Don Bauder Dec. 18, 2014 @ 2:17 p.m.

MichaelValentine: And to think the banks got away with this only six years after they almost destroyed the world financial system, and were bailed out to the tune of $13 trillion, considering both monetary and fiscal fixes. Best, Don Bauder

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MichaelValentine Dec. 18, 2014 @ 2:24 p.m.

So Don, which party do we vote for in the next election to bring it back in line?

Just kidding. Obama didn't prosecute anyone for the last lash up and the next President wouldn't either.

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Don Bauder Dec. 18, 2014 @ 2:33 p.m.

MichaelValentine: In the main, Democrats were the ones threatening to hold up the budget bill because of the noxious provision on derivatives. Some Republicans wanted to hold up the bill, but that was because of Obama's position on immigration.

Obama favored the bill. That is another mark against him. He said he didn't like the derivatives position, but was going for a compromise. Best, Don Bauder

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Don Bauder Dec. 18, 2014 @ 2:29 p.m.

Pat Flannery: Derivatives normally involve a huge amount of leverage, or debt. That is one of the biggest risks of them. I would think that as the value of the derivative falls, the borrower could call the loan. It might not be called a margin call, but it would be substantially similar. Best, Don Bauder

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Don Bauder Dec. 18, 2014 @ 2:36 p.m.

OOPS. I meant the lender could call the loan. Best, Don Bauder

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patflannery Dec. 18, 2014 @ 4:08 p.m.

Don, as I understand it, derivative counterparties do not make margin calls nor value their exposure other than the face value of the derivative.

As it is mostly banks, using depositor money, who both purchase and act as counterparties in derivatives for each other, there seems to be no brake on their trading, as is provided by margin calls in ordinary trading. Is there even a broker-lender account involved? If not there seems to be no limit on how big the derivative bubble could become.

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Don Bauder Dec. 18, 2014 @ 9:13 p.m.

patflannery: The derivatives bubble has already reflated. About 20 percent of derivatives trading may be legitimate hedging (on future interest rates, weather, a variety of things.) The other 80 percent is pure gambling -- often with our money. One problem, definitely, is that there is little or no brake on this trading. Another problem is it is enormously profitable (until the bubble bursts, as it did in 2008) so the banks fight fiercely for it. Warren Buffett called derivatives weapons of mass destruction, or something like that, but he has them in his own portfolio. One of the biggest problems, as you point out, is that derivatives are highly leveraged. Best, Don Bauder

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Javajoe25 Dec. 18, 2014 @ 9:35 p.m.

Don, I think it's absurd that Congress would allow the big banks to go back to doing what caused such problems previously, but from what I read, they wanted a lot more in terms of dismantling Dodd-Frank and if it weren't for Elizabeth Warren, the Senator from Massachusetts, it would have been much worse. I understand the trade-off was the Dems got a higher level of funding for the Commodity Futures Trading Commission (CFTC). Hopefully that will result in improved oversight and the and the big dogs will get slapped before causing another major fail.

Wish I could go to Vegas and play so that if I win I keep the money and if I lose someone else pays.

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Don Bauder Dec. 19, 2014 @ 7:06 a.m.

JavaJoe25: For some time now, bank traders have gambled with the knowledge that if they lose big, the government will pick up the tab. This is called moral hazard. It encourages unwise speculation, obviously. Politicians denounce moral hazard until a crisis arises. Then they abandon their objections and open up the purse to the gamblers.

Then after the bailout, the same politicians don't put the gamblers in jail. Best, Don Bauder

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Diogenes Dec. 19, 2014 @ 7:36 a.m.

Don, the casino economy is just a house of cards. They need to hedge their bets while taking on Russia. Why not double down? How else can the job creators bring real prosperity to America? He, he....

Peters and Obama just go along for the ride. Neocons and Neolibs are just different sides to the same coin. Just wait until the repo market freezes up again as oil prices slide.

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Don Bauder Dec. 19, 2014 @ 11:43 a.m.

Diogenes: I agree that the capital markets (mainly stocks and bonds) are being supported by the Fed printing massive amounts of money. Also, Wall Street creates kinky products such as the more complex derivatives, and there will be another 2008 caused by these instruments. In these senses, and in others, stocks, at least are a house of cards. But since the Fed is likely to keep up its prodigious printing of money in 2015, I don't think the house of cards is coming down next year.

The overall economy is obviously a house of cards, in the sense that the wealth and income gains are concentrated among the upper 10, 1, and one-tenth of 1 percents. Middle class incomes have been coming down for some time, adjusted for inflation, and that can't last, since consumption is more than 70 percent of the economy.

Bottom line, despite these houses of cards, you may be able to sleep for at least another year. Best, Don Bauder

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Diogenes Dec. 20, 2014 @ 1:58 p.m.

Don,

The economy is not recovering, unfortunately. Offshoring of manufacturing and outsourcing of jobs through free trade agreements left financial inaction and security action of the economy the only means by which the illusion of prosperity for the 1% could be maintained. The rest of the economy is hopeless.

Young people are having trouble finding full time jobs. Maybe one-half are living with their parents. Students must go into debt to attend collage. Most student loans are non - dischargeable in bankruptcy. Real estate is too expensive for most young people. Without money to spend into the economy by young people, how will our economy keep afloat? The answer is that it won't.

Derivative contracts have no reserves. Once these contracts are called upon to cover falling gas and oil prices, there will be another crash.

Fracking is uneconomical for the moment. That "boom" will not save the economy.

The new Cold War will result in an arm's race that is called "military Keynesianism." That spending might keep the economy going. If Russian can be looted again, oligarchs can make money. But I see a fight looming there.

I have the feeling that 2015 will be the end of the Petrodollar system and the American dollar as the reserve currency. A basket of currencies with commodities and special drawing rights will probably replace the dollar system.

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Don Bauder Dec. 20, 2014 @ 7:11 p.m.

Diogenes: I don't think the dollar will lose its reserve currency status next year, or a couple of years after that. What would replace it? The remninbi? Possibly a basket of currencies could at some point, but I don't think 2015 is the year.

I think the oil price will make a recovery in 2015. I don't think the big integrated oil companies and the oil exporting nations will sit there and watch the prices sink this low. The big integrated companies only have to cut production by a few percentage points to get stability. Demand will be weak, because most of Europe, Japan, Russia and some other countries will be in recession.

The central banks will continue printing money promiscuously. This can't go on forever -- the Fed's balance sheet is in horrible shape -- but it can go on another year or two.

Remember: I could be wrong. Best, Don Bauder

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Diogenes Dec. 21, 2014 @ 6:14 a.m.

Don: Always appreciate your wisdom. But job statistics are manipulated. The situation in the US is worse than many realize. The Baltic Dry Index shows that the world economy is stalling out. Corruption in the financial sector is rampant, and goes unpunished. The US is pivoting to Asia and East Europe while militarizing it's police forces at home. Economic collapse is coming; just when may be dictated by environmental factors. Fracking is another bubble that is popping. Black swans swarm...... A few cyber attacks on critical infrastructure could bring down grid. What then?

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Don Bauder Dec. 21, 2014 @ 7:13 a.m.

Diogenes: There are no doubt multiple risks. We are living on the edge -- no argument there. The unemployment rate is misleading; what you have to watch is household income, and that tells a gruesome story. However, people have no idea how much wealth and income is concentrated in the upper 1 percent and one-tenth of 1 percent. Polls show that Americans vastly understate that gap.

The world economy is definitely stalling. Most of Europe, Japan, Russia are in deep trouble -- definitely of the recession designation -- while some oil-exporting countries such as Venezuela are really hurting. The U.S. cannot dodge this misery; it's a global economy.

Fracking is a major cause of the collapse of oil prices. If the price keeps going down, fracking will no longer be economical. That won't be a big loss; fracking takes huge amounts of water. I would rather have water than oil at this point. I do think the oil price will be manipulated back up -- maybe to $75 at the end of 2015.

Black swans definitely lurk. The possibility of cyber attacks is chilling -- perhaps the world's biggest vulnerability. I don't see a world economic collapse in 2015 or 2016, however. Best, Don Bauder

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