The Fed Has Set the Stage For Another 2008-Style Disaster

Phoenix Capital Research's picture

Time and again, we’ve been told that the Great Crisis of 2008 has ended and that we’re in a recovery.


Indeed, earlier this year, we were even told by Fed Chair Janet Yellen that the Fed may in fact raise interest rates as early as next year.


If this is in fact true, how does one explain the following statement made by the Fed’s favorite Wall Street Journal reporter, Jon Hilsenrath?


One worry: As they move toward a new system, trading in the fed funds market could dry up and make the fed funds rate unstable. That could unsettle $12 trillion worth of derivatives contracts called interest rate swaps that are linked to the fed funds rate, posing problems for people and institutions using these instruments to hedge or trade.


So… the Fed may not be able to raise interest rates because Wall Street has $12 trillion in derivatives that could be affected?


Weren’t derivatives the very items that caused the 2008 Crisis? And wasn’t the problem with derivatives that they were totally unregulated and out of control?


And yet, here we find, that in point of fact, all of us must continue to earn next to nothing on our savings because if the Fed were to raise rates, it might blow up Wall Street again…


Simply incredible and outrageous.


What’s even more astounding is that Hilsenrath is in fact understating the issue here. It’s true that there are $12 trillion worth of derivatives contracts related to the fed funds rate… but total interest rate derivatives contracts are in fact closer to $192 TRILLION.


And that’s just the derivatives sitting on US commercial bank balance sheets. We’re not even including international banks!


So…the US economy is allegedly in recovery… the financial markets are fixed… and all is well in the world. But the Fed cannot risk raising interest rates to normal levels because Wall Street has over $12 trillion (more like over $100 trillion) in derivatives contracts that could blow up.


That sure doesn’t sound like things were fixed to us. If anything, it sounds like the stage is set for another 2008 type disaster.


This concludes this article. If you’re looking for the means of protecting yourself from what’s coming, swing by

to pick up a FREE investment report titled Protect Your Portfolio. It outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research




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kenny500c's picture

They are probable blowing up at this very minute.

Remember everbody was 100% convinced that tapering was going to result in 4% 10-yr note yields. So they leveraged up on that foolish assumption. I had posted here and on other sites that tapering would ding the economy and result in lower note rates. Where are we now? How does 2.34% grab you? 

As the financial destruction ensues, partipants rush to the safety of treasuries, exacerbating the losses.

I Write Code's picture


Weren’t derivatives the very items that caused the 2008 Crisis?

No.  Derivatives are - wait for it - derivative.  What I think you mean is leverage, and even that was not the *cause* though once things went crazy leverage made it 30x more crazy.

And the next disaster may not be so easily restrained.  We managed to fix the 2008 disaster with a trillion dollars a year in printing and borrowing.  Peanuts, hey.  This purported prevented a MUCH BIGGER DISASTER.  The next one will probably *be* that MUCH BIGGER DISASTER.

But it may not be as close as that, we may be lucky enough to just have twenty or thirty years of stagflation and brush wars instead.


Frankly Speaking's picture

Gold standard? I thought the whole shit fest of fractional reserve banking began under the gold standard when the vault masters realized that all of the gold would never be asked for at once. They began to issue more receipts than there was gold. Charging interest on gold that did not exist.

But all of this has nothing to do with a gold standard, tulip standard, or fiat standard. It has everything to do with who controls the issuance of the currency. A cabal of private bankers for their private benefit, or, the treasuries of nations for the benefit of their citizens?

It is astonishing really that this private fed has gone on for 100 years. One hundred years of payoffs and contributions to control the narrative of America, and the world for that matter.

Bread and circus? Simply astonishing.


JimS's picture

Frankly: you nailed it. Being on a "gold standard" is bullshit. All they (the banksters) will do under a "gold standard" is issue paper notes for the gold. The power to control, define, issue, and regulate the issuance of any currency is the key. That's why third parties (private banksters, high religious priests, dictators, and monarchs) are desperate to maintain the control of any civilized society's "money" system. This has been going on for 2500 years. Read the "Lost Science of Money", and you will understand this powerful relationship.

Bemused Observer's picture

" But the Fed cannot risk raising interest rates to normal levels because Wall Street has over $12 trillion (more like over $100 trillion) in derivatives contracts that could blow up."

So what? Sounds like a personal problem to me.

AdvancingTime's picture

Both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Promises were made on the assumption that the advantages we enjoyed would continue.

Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Now reality has begun to come into focus and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have become overwhelming. More on why this system will fail in the article below.

Accounting101's picture

In other words, you did not understand the post, specifically about the derivatives bomb? 2008 didn't happen because of Social Security, Medicare or librarians getting $12,000 a year pensions. 2008 was a financial crisis not a government debt crisis. It now has turned into a sovereign debt crisis because $23 trillion of Wall Street and financial services industry debt was heaped upon the public while you had your finger in your ass.

Stop carrying water for the oligarchs.

free_lunch's picture

"Both people and governments have lived beyond their means by taking on debt they cannot repay."

-> Paul Grignon ?

Stroke's picture

I call Bullshit....End the wars, and slam down military spending, and the country's financial outlook improves dramaticly


Another paid troll to encourage the mindset that everyone is undeservadly on the dole....BULLSHIT

TrulyStupid's picture

It is true that the overwhelming malinvestment at the root of the debt crisis is  foreign wars, "defense" and domestic "security". But the "black swan" of world and domestic peace will bring down the whole ponzi. That is why we are scouring the earth for new existential threats, boogeymen and failed states to rehabilitate. The big show must go on or we slide down a very large rabbit hole.

ramacers's picture

12T is a big # but not crippling. 100/192/300T could not be handled. 

DerdyBulls's picture

Let's get it over with already.

Jano's picture

worse is better.

spinone's picture

It will be completely different that 2008, because this time the liabilities have been transferred to the balance sheets of nations.

TeethVillage88s's picture

Larry Kudlow on the Radio now:

A) He is against Individual Savings
B) He is against higher Compensation
C) He is against higher employment, or government education, or low cost education, or partnership with industry, or creating environments for worker hiring, or for government education of itself on the skills levels of US Work Force
D) He is against high interest rates to aid fixed income people, he is Fascist

Thanks Larry Kudlow: 90 Million unemployed is on your head

JimS's picture

Kudlow is a total piece-of-shit.

saveUSsavers's picture

Crudlow is the most sinister arsewhole ever allowed on tv.

Burticus's picture

I believe Phoenix Capital, but I don't need them to tell me that the way to cover my @$$(ets) is with 100 ounce silver bars stuffed in my back pockets.

Eyeroller's picture

All Yellen cares about (same for those before her) is keeping the Ponzi Scheme in place until she reaches comfortable retirement.

Japan has blown the bubble up for 15 years, and it still hasn't popped (but looks like it will soon).

The only lesson from Japan for Yellen will be that the Fed can keep kicking the can down the road and others will have to deal with the consequences.

bunnyswanson's picture


Nick Eusepi | October 12, 2011

I am an economist, and almost 2 years ago I have advised most parties in contact that 300 trillion USD was the estimated summ of derivatives (at the time) of was not being solved. Mosto of these 'credits' are hung up in an internal bank intranet called "blue screen", were they lay in a virtual extraterritorial suspension state, awaiting to be newly invested or…..'grounded' with realitve tax payments in any comuntry of investment. What does this mean?

Now I beleive its' true that today the total ammount has virtually and uselesly swollen to 600 trillion, even though it is all paper and virtual, because as said it has not payed taxes. I also gave stimula and advice to policy makers in ONU, USA and Europe, on how to deal with this cancer, but most of them are totally incompetent, as well as top banking officials, so that no one is doing anything.

The point is all here, in the consideration of the virtual and non-legal value of those derivatives : what if we propose that blue screen creditors may have their money only if 'grounded' and tax paid under international rule? If states cash those taxes, we would have a total upgrading of the markets as well. Of course this operation is not easy, it needs brains, which are lacking. Private owners of blue screen sums must be encouraged to apply to what must be an opportunity, not a dungeon.

For example, we could ask States to invest immediately the gained taxes in gold: the value is there because gold would soar up (also considering that the stamps of a lot of gold bars arround have not been renewed. Many other ideas are to be linked together but I dont see this work is done, I hope we continue to discuss with you.
N. Eusepi

Joebloinvestor's picture

Radiation will destroy Japan physically before the economic policies and that will continue the myth that they work.

RMolineaux's picture

Hilsenrath says the FF rate may become erratic.  I assume he means because of low volume.  Is there anywhere where one can find out the volume in the FF market as compared to earlier periods?  This market depends heavily on the trust level between major traders.  If this has been weakened by the 2008 experience, then the use of the FF rate as a basic interest marker and a Fed policy tool is put in doubt.  The Fed has two other tools it can use to set the basic interest marker:  the rate of interest it pays on excess reserves, and its newly-established participation in the repo market.  The first has the advantage of being entirely controlled by the Fed without the need to maintain a trading desk.  I would like to see comments from participants and other observers.

NoWayJose's picture

All it will take is one of the TBTF banks making a bad bet using those derivatives.

Grouchy Marx's picture

2008 type disaster? I believe the disaster coming will completely overshadow 2008.

joego1's picture

The world will be a very different place after this round is over.

Mr. Ed's picture

If you already understood how interest rate swaps worked and had experience trading them with the fed funds rate as one underlier, then this article contains almost nothing of value; because all you're saying is that there is individual and institutional exposure ahd that it is large.

If you are not familiar with the detail of the average FFR rate swap contract (what would be the typ counter rate? what is the per point sensitivity to a change in the FFR? what would the typ leverage be? what types of colateral would be at risk? etc..,) then this is just another meaningless post about some issue that leaves me as ignorant of the subject as I was when I began reading it.

I have never traded interest rate contracts and so I have very little real world familiarity with what counterparties are likely to be doing or with the situation they're in.  I don't think the average ZH reader does either.

A little granularity here, PLEASE!

JimS's picture

Go back to eating oats Mr. Ed.

DerdyBulls's picture

Wow. You're really smart. Tell all what to do with our money, Mr. Ed.

Tinky's picture

50% hay and 50% carrots.

Mr. Ed's picture

E-E-E-E-E-E-e-ah!  Snort!

W-e-e-e-e-e-ll....excu-u-u-u-u-u-se me.  Snort!   Maybe I did learn SOMETHING: is it really 12 out 192 TRILLION?  I DID NOT KNOW that.  E-E-E-E-E-E-e-ah!  Snort!   Wilbur just pointed that out to me.  Wilbur, Wilbur... Wilbur,  where are ya?

And I thought this post was just a lazy pap-piece excuse to advertise yer newlsletter.  I'm sorry for expecting a little more effort.  Whaddya want from me, I'm a horse.  Snort!

Excuse me, I'm gonna run out at a gallup and buy a subscription to yer newsletter  right now!  E-E-E-E-E-E-e-ah!  Snort!

disabledvet's picture

Meh.  Hedge fund performance has been the only dog in this recovery.  "Gotta pay extra for underperformance!"

Get to a gold standard and then society at large can eliminate the middle man.

Bossman1967's picture

looks like an ad for precious metals to me. got enough ty