Susmit Kumar, Ph.D.

The rich people are not getting richer on their own, but with the help of government. The people on Wall Street are making hundreds of millions of dollars in bonuses while helping rich people to become ultra-rich who invest in Wall Street hedge funds. Due to government deregulations, the people in Wall Street have been making this much money using special (financial) instruments like Credit Default Swap or CDS, Short Selling, Derivatives, Options, Futures, Forward Contracts, participation of financial firms in commodity market, etc. These activities have no social value at all. They are not contributing anything to the general economy except, of course, that they increase the GDP of the nation, distorting the distribution of wealth. The government has authority to revoke or regulate these financial instruments.

For an example, a CDS is a credit derivative contract between two parties. In mid-1990s, CDS was invented by a JP Morgan Chase team. The CDS buyer makes a series of payments to the CDS seller, and in return receives a payoff if the underlying financial instrument defaults (a mortgage, loan, bond, etc.). Unlike insurance, the CDS buyer does not need to own the underlying financial instrument (i.e. loan, bond, etc.). It is nothing but gambling. Under the Commodity Futures Modernization Act of 2000, the Congress made it illegal to regulate the CDS. In mid-2008, the global derivatives market was close to $530 trillion. The global CDS market increased from $900 billion in 2000 to $55 trillion in mid-2008. The banking crisis which began in 2008, related to credit-default swaps, raises a question of whether this was just a pre-cursor to what can happen in the future if hedge funds and investment banks keep creating trillions of dollars of house of fake money. If the situation remains the same, the same scenario will happen again and again, and the government will have to come up with trillions of dollars of bailout funds every time for the mischief of these casino hedge fund gamblers as we do not know what kind of zombies, i.e. special money making mathematical and statistical software are being created inside Wall Street and other financial systems that may lie dormant for years and then ready to explode under certain conditions.

For an example, Long-Term Capital Management (LTCM), a U.S. hedge fund, lost a whopping $4.6 billion in less than four months following the 1998 Russian financial crisis, leading to a massive bailout by other major banks and investment houses which was supervised by the Federal Reserve. The mathematical and statistical software of the LTCM was responsible for their whopping loss as the software was not designed to handle the sharp drop in the currencies like Russia’s ruble. Fed had to rescue LTCM otherwise it would have led to a wider collapse to the financial markets. After its foundation in 1994, LTCM had annualized returns of over 40% (after fees) in its first years. Its board of directors members included Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences. LTCM was liquidated in early 2000.

The economies of the East European countries were on the verge of collapse in 2008. In an October 2008 speech, President Basescu of Romania pinned the blame on “corrupt” outsiders. He said, “There were smart guys coming to Romania, who had studied at Harvard and Oxford, and they invented how to increase the value of one’s shares without actually having money.[1]

If a firm gives you special privileges, then they charge you extra money. For an example, airlines charge extra money for first class seats. Similarly as Wall Street and hedge funds, which are making billions of dollars by using financial instruments provided (due to deregulation) by the government, the government should impose extra tax on these firms.



[1] Whitlock, Craig, “Financial Crisis Leaves Romania Reeling,” Washington Post, November 5, 2008.

 

 

 

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