The core cause of the financial crisis of 2008, and again today in 2020, has been the dangerous impact of derivatives markets created by large banks, insurance companies and hedge funds. Speculative trading practices by large banks were outlawed in this country under the Glass-Stegal Act of 1935. But in 1999, at the end of the Clinton Administration, Glass-Stegal was repealed. This repeal, along with passage of the Commodity Futures Modernization Act), during the Bush II administration, opened the door for massive speculative trades in complex derivative instruments.
To be sure, in 2009, the Dodd-Frank Wall Street Reform Act attempted to regulate credit default swaps to a degree. But in response, US banks and hedge funds shifted speculative derivatives trading overseas, and then lobbied congress to limit meaningful regulatory enforcement of Dodd-Frank, the “Volker Rule.” As a result, speculative trading in the global derivatives markets has continued relatively unabated to this day.
In recent years, famed investor Warren Buffett pulled no punches in calling speculative derivatives “weapons of mass destruction.” In his 2017 letter to shareholders, Mr. Buffett explained: Continue reading “FMV PART 2: IMPACT OF DERIVATIVES MARKETS”