How Higher Interest Rates Could Trigger Another 2008-Type Event

Phoenix Capital Research's picture

interest rates are coming and coming fast. The Fed has spent Trillions trying

to lower
interest rates (more on this in a moment), and it’s now officially lost control
of the long-end of the Treasury market.


This will
have ENORMOUS implications for the US housing market and financial system.
Housing prices will be collapsing in the coming months as interest rates soar.
We could also very well see another 2008-type event (a collapse of the US
Financial System) as well.






In 2008, the
entire financial system nearly went under due to the Credit Default Swap market
which was $50-60 Trillion in size. In contrast, the interest-rate based
derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at
hits peak.


At this size
you only need a very small percentage of these derivatives to be “at risk”
(meaning real money is bet on them), say 5% to get $10 trillion in potential
losses. To put that number into perspective, the entire WORLD STOCK MARKET is
only $36 trillion in size.


See the
potential risk here?


To say that the US financial system is in
danger would be a HUGE understatement. It is the derivatives market, NOT the
housing market that has the Fed concerned.


Sure, the
Fed claims it’s engaging in QE and other tactics to help housing, but this is
just a political move aimed at quelling the US public’s growing outrage. You
can tell this because of the fact that interest rates have in fact JUMPED every
time the Fed engaged in QE:



There is no
way any human being could claim that QE is about helping housing prices. It is
aimed entirely at funneling TRILLIONS of Dollars to the Wall Street banks. Why?


these are the banks with the GREATEST derivatives exposure.



Trust me,
Ben Bernanke is well aware of this situation. Even his predecessor, Alan
Greenspan, knew about it as far back as 1999. At that time he told Brooksley
Borne that attempting to rein in the derivatives market and forcing it to pass
through a public clearinghouse would “implode” the market.


Remember, QE
is all about the Fed buying Treasuries FROM the Wall Street banks. In this
sense it’s nothing more than an effort to remove assets from their balance
sheets in exchange for cash. And that’s exactly what it’s supposed to be: an
attempt to shore up the Wall Street banks MASSIVE derivative exposure.


This is why
the Fed keeps launching more and more QE programs despite the clear fact that
it has failed to accomplish any of its publicly stated goals: boosting
employment, lowering interest rates, etc. Bernanke knows if he doesn’t keep the
billions in weekly capital infusions to the Wall Street banks that the entire
system will come crashing down.


Be aware,
the issues that caused 2008 are still in play. If Bernanke loses control of
interest rates on the short and long end its GAME. SET. MATCH. for the US
Financial System.






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take steps to prepare for the Second Round of the Financial Crisis… I highly
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Robbie4's picture

Hello, I am a rookie in economics, but I am trying to understand a little more about what is happening and therefore I read zerohedge for some time now. I have a question about the above article and I hope someone will take the time to explain it to me. I don't understand why QE2 would help the PD's to be less exposed to these derivatives. As far as I know, the Fed buys Treasuries (and no other assets) with cash (I know this was different with QE1). But because I suppose Treasuries can also be used as collateral for financing these derivatives, I don't understand why QE2 would diminish the exposure to these derivative risks. Maybe it is a very stupid question, but I hope someone can explain could explain it to me. Thanks in advance!

omer10's picture

What a fucking waste of time. This guy has been calling the market top since 1165, and that's only since when I followed him. There should be penalty to this, these people should not be making predictions twice a wee here with no accountability. I was a novice to ZH and big words some of these contributors got to me, I lost a ton of money. Maybe a feature could be added to this site, which I love, that enables tracking predictions. Now I notice non of these, -there is this and all-knowing NIC Lenoir!)- are top-calling anymore, but I am sure when the market turns even it is at 1440, they will begin to shoud I told u, when at 1170!) LOL.

Ned Zeppelin's picture

Just promise to check back in if the predictions prove to be true.

irishlink's picture

It all goes back to doing GOD'S work and the thousands of meanings that this slip of the tongue revealed. 

cougar_w's picture


Now that's what I can financial innovation, son.

vote_libertarian_party's picture

Ok, I missed something.  Why does the writer think NOW is when the derivatives will blow up?  When the 10yr goes from 3.75% to 4.25%???


Why not when it crosses over 5%?...6%???


I think rates are going a lot higher too, I'm just looking for some analysis work here rather than a screaming headline.

falak pema's picture

Maybe Mubarak with his cash could finance the FED into buying JP Morgan's exposure on derivatives. Put the plutocrats to work. Tax the multinationals on Cayman Islands. Invade Leichenstein and Luxembourg. Declare Singapore and Hong Kong off-shored accounts part of the global solution. But whose going to bell the cat to start this ball rolling?  

Dan The Man's picture


is it really that much in derivatives?  holy shit

Eternal Student's picture

No, the article is misleading in this regard. The article is only focusing on a subset of the total derivatives exposure. The BIS reports that there is about $640 Trillion in derivatives world-wide. That's only what's known. The stuff which isn't reported probably doubles that number at least. But since it's not reported, no one can say for certain.

So if you understood that "small" subset of the Banking exposure, you can now better appreciate why Bernake et. al. thought the world was going to come crashing down back in 2008.

And (as has been reported here on ZH and other places) why it's guaranteed to happen again, since little to nothing has been fixed since then.

Zero Govt's picture

20 years of running out-of-control on Wall Street brings quite a large exposure!!!!!

....Bring in the Clowns, err sorry, the systemic-risk Regulators, they've been rifling through everyones books for decades they must know exactly what risk this poses, have done their sums like good Boy Scouts and know exactly how to deal with systemic risk exposure afterall that's their precise job right? from harmful business practices, Regulators are on top of it  

Problem Is's picture

This Summers speaks Truth...

Let Jamie & Lloyd Bat Leadoff on Bastille Day
I'd love to see those 4 TBTF derivative kiting fraud mongers go down in flames...

Tic tock's picture

Big picture stuff, huh... Western Political philosophy and the control of money are neatly interwoven threads. That was one of the nice things about cowrie-shell-economics- not just that it wasn't debt-originated, but that it, itself, was symbol of hope, in the mode of production. FRNs' have such a vaccuous symbolism, right up to the all-seeing eye; I mean really, how presumptuous - this, this situation was unforeseen! ..liquidity was way too high and increasing while market-expansion was decreasing...what fiscal tightening, except for the year preceding the crash. The whole point of independance for Central Banks is so they take measures at the right time, which is always different from when it is convenient for the commercial banks.  

But the Banks and the government - they live with banking and nation-building every hour of every day - and they think we should too. For some reason it is 'important' that we should all be on the same page. ! . The people don't give a shit about what happens in D.C. or Wall St. The Bankers failed, they're insolvent, that's failure. Congress runs out of money two years later. That's also a sort of failure. But you know, most people don't care - why? Because people don't want Government in their face. Yes, they want a sensible industrial policy and yes they want laws and regulations enforceable, they want oversight to protect the vulnerable members of society. What the people want is much, much smaller than the current range of services. ...the rest is 'whatever'...if the banks just threw their ledgers out the window tomorrow and the entire deficit was just erased and the UST market reset, and started all again with made-up numbers, people still wouldn't care. What they care about isn't being provided - all the yapping come out of D.C. and New York, it means nothing. Access to credit to new farmers, that's important. We know the markets don't work, Logistics works, but the pricing mechanism is obviously wrong. This is it though, the control of money is too slipshod to govern a county. And the government and the banks have now failed as a direct result.

The Banks will fight with every penny they have, to retain control of the money supply. That control of the money supply defines Banking as it is perceived today. Yet it is a pyrrhic hope. Prices are way too off-base to engender a stable economy, the middle-class have far too high a propensity to be indebted to rebuild a consumer-orientated society. Investment and interests rates can be normalized, but at what cost to Bank funds utilization. ..on top of SovX? Banks have to be the worst return on Equity going forward, the only, only, plus in their favour is that they can ride the 'hyper'-inflation train.

this is no longer about the Banks, this is how Congress, and if not them, then the States, begin the 'orderly transition' to a new Western philosophy of Government, based on mushroom cultivation.

Eternal Student's picture

"The Banks will fight with every penny YOU have, to retain control of the money supply."

There. Fixed that for ya. :)

Lord Koos's picture

Exactly what kind of mushrooms are we talking about?

EconomyPolitics's picture

Higher interest rates are inevitable as they are desired.  If JPM goes down, someone else will take their place.  

Higher rates has to lead to lower home values as can be expressed by common logic or by this article.

But thte question I would have to you, what does the fed do now that rates literally cannot get any lower.  

second, doesn't the Fed create disincentives for savings with too low of rates.  Is that healthy?  Is a negative real interest rate healthy?  

jmc8888's picture


But I'd still rather take the 'out'. Glass-Steagall

Glass-Steagall the RMBS, CMBS, derivatives, all securities, off-balance, etc

(don't worry the banksters are still screwed this way too...just we aren't...within reason given the circumstances...[and that last part is NOT an excuse for idiots accepting suboptimal paths going forward])


LMAOLORI's picture


Obama's Favorite Banker Has Spoken He Has Enough Money lol They May Do Stupid Things With All That Money They Made Off Us!

Demon also highlighted that J.P. Morgan is ready for higher interest rates.

JPMorgan CEO Jamie Dimon Donates Serious Cash to Democrats



President Obama's Favorite Banker



Zero Govt's picture

yep it's nice and chummy at Club Parasite

LostWages's picture

If I didn't know better, I would think I accidentally pulled up the Onion website.

TD does a great job presenting the truth, and scares the shit out me at the same time.

Have we nobody in a position of power willing to say "The Emperor Bernank has no clothes"?  Or has everyone just turned into a greedy BTFD whore? 

This country is quickly becoming like Mexico with no middle class.  Try selling your cars, Ipads, and Blackberrys when the majority of the population spends all their income on food, clothing and energy. When the EBT cards stop buying enough to feed their families, the poor will just take what they need. 

The fucking compulsive Wall St gamblers are raping the country.  Time to go long pitchforks, rope, tar and feathers.


cxl9's picture

Mexico's middle class is visible and growing rapidly. Even in my area of Mexico (in northern Baja) the middle class growth is evident: new housing developments with modern conveniences, shops and grocery stores catering to the growing affluent, and increasing and more expensive automobile ownership. Mexico's middle class is small, to be sure, but it is growing just as, sadly, America's is shrinking.

LFMayor's picture

You're talking about the cartels, yes?  Business is booming, and plenty of turnover to assure rapid promotion!

Eternal Student's picture

Good article. This has been apparent to a number of folks for a while, and it's nice to see someone calling this out explicitly again.

I wouldn't be surprised to see the stock market tank when there's need to drive investors back to bonds, in order to keep rates low for a while longer. Like in the next few months.

But I agree, as I've mentioned before, that eventually they won't be able to keep rates down. And the consequences of that will be significant, for many of the reasons stated.

myshadow's picture

Is this why NYSE was allowed to be gobbled up by the germans?  I heard today the regulation of deriviatives is looser in EU.

chump666's picture

Any Aussies on here?

Rumors on wires, Aust bank downgrades coming through from Moody's...just a rumor though

OddFieldIsStrong's picture

Where is the rumour coming from? On what basis? Aside from the property asset bubble, they have one of the best current accounts and public debt load. Lots of other countries should be on negative watch/downgrade before them. (I am a kiwi)

BigDuke6's picture

Yeah, moody's are gonna look them over.

They are fine, no sub prime, good capital, only 4 so have a big monopoly and treat the customer like shit.  very fat profits.

i guess its because they think there is a housing bubble here which is probably not true - prices are flat here but won't go down.

Over-priced. yes.  Why won't go down?  Endless stream of skilled migrants bringing cash from a dying europe.  And the big one - negative gearing where you right off on your tax, the difference between your rental income and mortgage cost .  What does it mean?  i own 3 investment properties to minimise my tax and any drop in price i'll buy more.

it aint going down

AUD / USD to 1.10 by year end cobbers.

hammondo's picture

"I own 3 properties" 

i junked you sir..your are a RE Bull & you are talking your book.

Negative gearing an asset that is going down in value is a strange investment strategy IMHO 

best of luck tho 

BigDuke6's picture

ha ha! i accept it sah.

i grew up with nothing so it is bricks and mortar first with gold a distant second.

i'm dour tho' and not a bull on anything - just dont want to lose what i got already...

topcallingtroll's picture

Yeah I think it was pretty clear the fed buying was more about shaping the yield curve, and possibly providing banking sector liquidity. Housing was a secondary issue. Derivatives should be fully hedged and it is VaR or variance at risk or net derivative exposure thst is the important number. We dont know those numbers. The total number is fairly meaningless. Unfortunately we will never see the proprietary VaR numbers.

dick cheneys ghost's picture

no bailouts. let them die................

chump666's picture

Yeah liquidity crisis coming.  The unwind? ETF's, as liquidty gets sucked out of funds.  Then the HFT's short...

DavosSherman's picture

Super read!

Paul Ryan et al should have asked Bernanke about that when Bernanke lied to them about raising rates.

Nice to know they could have done something about derviatives way back when.


More Critical Thinking Wanted's picture


Super read? More like incoherent gibberish:

The Fed has spent Trillions trying to lower interest rates

The Fed has spent trillions only if you think US government bonds are worth zero. If you think so then you probably would find the transfer of all your 404(k) bond holdings (assuming they are over $10K) over to me for 1 ounce of gold a fair deal. Deal?


it’s now officially lost control of the long-end of the Treasury market.

Talk about being confused! The Fed desperately wants long-term rates to rise (they track inflation [and growth] expectations), because in August the Fed saw persistent deflation edging closer - so it wants to see more 'core' inflation.


In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size.

No, in 2008 Apocalypse was nigh not due to the CDS market or other derivatives: that was banks owing to banks, big numbers but an internal matter mostly.

In 2008 the system almost blew up because Bush & Paulson let Lehman fail to set an example, to screw the rest of the world (while still hypocritically bailing out the rest of TBTF) but while doing all the bail-out they forgot about the shadow banking system and the effects of the credit freeze on repo liquidity.

Unlike most derivatives, the shadow banking system is the artery of the real economy. Letting it fail would have instantly bankrupted companies in the thousands.


Sure, the Fed claims it’s engaging in QE and other tactics to help housing, but this is just a political move aimed at quelling the US public’s growing outrage. You can tell this because of the fact that interest rates have in fact JUMPED every time the Fed engaged in QE:

Wrong again. The Fed's mandate is to keep prices stable and to keep unemployment low. As such the Fed did QE to fight deflation and to fight unemployment.

Rising interest rates obviously fight deflation very directly and the hope of economic recovery might fight unemployment as well.


Stopped reading it there - pointing out four epic fails per article should be more than enough critical thinking.


Ned Zeppelin's picture

Not sure I'm buying what you're selling More Critical.  Just sayin'

Lately, it looks to me like QE's goal (other than to enrich the PDs, discussed below) is to monetize the debt. 

On the long rates: if mortgage rates rise, values of homes decrease. More underwater assets held by the TBTFs and more MBSs they sponsored looking for putbacks.  This will kill them.

Consumers with stagnant wages will spend more on food, energy, less on other consumer goods.  Can only borrow so much. More stress.

Bush had nothing to say about Lehman - Paulson seized the opportunity to wipe out Lehman to eliminate competition for Goldman Sachs.

There is no tick upwward in unemployment as a result of anything the Fed has done, although I'll grant things might be a bit worse but for QE (but kind of doubt it).

QE has enriched the Primary Dealers and is all about rebuilding their cash stores. It has no other purpose.  All the other reasons are window dressing for public consumption.

Them's the facts.

meizu's picture

surely you are not suggesting that the entire 2008 finanacial crisis happened only because the goverment did not bail out an investment bank? The fact that bankers need trillions of welfare from tax payers means there are fundamental problems in the economy.

More Critical Thinking Wanted's picture


surely you are not suggesting that the entire 2008 finanacial crisis happened only because the goverment did not bail out an investment bank?

I'm not suggesting that - in fact I'm suggesting that all of them should have been let to fail.

What I said was that while letting Lehman fail, Paulson/Bush forgot about a critical piece of infrastructure - and letting that fail could have brought and end to modern civilization as we know it.


brown90's picture

More Critical

You are absolutely correct. This article was obviously written by some headline chasing, self promoting "analyst". Most likely some equity strategist who understand very little if anything about how derivative markets work. However I think you may be confused and posted it on ZH were your comments for the most part will go to waste.

Augustus's picture

More Critical,

Great response to the heap of nonsense.  I would also add that the Fed purchases of assets from the banks in the various versions of QE has nothing to do with helping the banks' balance sheet.  It is simply a conduit that allows the US Treasury to have "auctions" with bidders.  The banks buy to simply resell to the Fed.  When there are no Fed purchases (end of QE) who will bid?

LawsofPhysics's picture

What about the massive "fees" and "bonuses" transferred to the bankers for playing this shell game?  Looks pretty much like a wealth transfer from 401Ks to those that caused the crisis to begin with.  Moreover, if everyone is so worried about deflation, then why has my property tax bill gone down like the local real estate market?

It seems to me, deflation/inflation is irrelevant and all that really matters is purchasing power.

More Critical Thinking Wanted's picture


Good question. Interestingly, when QE1 ended in early 2010, the 10Y started dropping:^TNX&t=2y&l=on&z=l&q=l&c=

and went from almost 4.0% down to the 2.0% line in a few short months (with the dollar strengthening as well - partly due to the EU crisis) - despite supposedly lower demand, mirroring what Japanese bonds did before deflation got embedded in their economy.

So while part of it was certainly global repositioning due to the European crisis, another part was deflation expectations, underlined by record low core-CPI/core-CPE indices.