Treasury Secretary Timothy Geithner has decided to exempt foreign exchange derivatives from clearinghouse requirements set forth in the already notoriously weak Dodd-Frank financial reform bill. On April 29, 2011, Assistant Secretary for Financial Markets Mary Miller said there was no need because foreign exchange derivatives were a "well functioning market." There are just a few things wrong with that statement. First, the first time derivatives blew up, shaking financial markets, was back in 1998 when Long Term Capital Management (LTCM) went kerblooey because of foreign exchange action following the 1997 Asian banking crisis and the 1998 Russian default. Second, after the 2008 meltdown, the Fed ran programs eventually amounting to $5.4 trillion to stabilize foreign exchange markets. Third, the foreign exchange derivatives market is $30 trillion in size or twice our current GDP. Fourth, there is a lot of potential instability in foreign exchange markets. The euro could well not survive. Japan is reeling from the earthquake and tsunami. The UK's austerity policy is failing and dragging the country's economy even futher down. China is being squeezed between rising commodities' prices and the need to keep the yuan low to underwrite exports as well as serial bubbles. So far all this has led to a devaluating of the dollar, but if any of these economic powers goes or there is another general downturn in the world economy, there will be a flight to safety and subsequent revaluation of the dollar. Sixth, netting which is used to defend the stability of derivatives markets in general is a dishonest fiction. Netting is when a bank buys derivatives as insurance to cover both sides of a position. If a currency goes up against another currency, they're covered. If it goes down relative to it, they're covered for that too. However, in a major crisis or a downturn, most of the sellers of derivatives covering the downside will be quickly wiped out and so most of those positions for which they sold derivative insurance will not be covered. Seventh, because the dollar is the world's reserve currency, many international business deals are denominated in dollars. In the event of a major crisis or worldwide downturn and a flight to safety to the dollar, there will not be enough dollars out there to cover all the dollar denominated deals. This was a prime reason for all the large swap programs the Fed ran with central banks around the world after the 2008 meltdown. It was basically supporting the foreign exchange markets and protecting them from the consequences of their own miscalculations.

Anything as big and as prone to failure as foreign exchange markets needs not just regulation but close regulation, much more than is even in Dodd-Frank. That Geithner is taking them out of the mix is just another example of him acting on the banks', not the country's, behalf. Why am I not surprised?

(item 258 of my Obama Scandals List)