At the recent Democratic National Convention, both President Obama and former-president Bill Clinton made it plain that the regulation of some of Wall Street’s more exotic financial instruments, particularly ‘over-the-counter’ (OTC) derivatives, is back on the political agenda. As Clinton said in his barnstorming speech, “They [the Republicans] want to get rid of those pesky financial regulations designed to prevent another crash and prohibit federal bailouts.”
I’m not surprised that this is a hot topic. OTC derivatives were the supposedly clever devices that turned a financial problem – the sudden collapse of U.S. housing prices at the end of a classic boom – into a global financial crisis from which we have all yet to fully recover.
More than the entire world’s assets One of the problems with derivative contracts is that the sums of money involved are potentially, quite literally, limitless. A recent report by the consumer advocacy organization Public Citizen, called Forgotten lessons of deregulation, makes this point very forcefully. “Over-the-counter derivatives trading grew dramatically in the years following passage of the CFMA,” the report states. “The notional value of such trades [...] increased from $95.2 trillion in 2000 to $672.2 trillion in 2008 — a more than seven-fold increase. By contrast, the entire world’s assets in 2008 added up to only $178 trillion.”