Is This the End of the Current Financial Markets?

Should markets be restructured to outlaw derivatives and bring back the Glass-Steagall Act?
By James Gorrie
James Gorrie
James Gorrie
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, He is based in Southern California.
March 20, 2020Updated: March 23, 2020


Is the CCP virus to blame for the financial markets’ crash?

Yes, it is … and no, it’s not.

A Catalyst, Not a Cause

We can certainly say that the growing pandemic has triggered what looks like the death throes of financial markets around the world. Whether it’s the end of markets as we know them or not, it’s frightening to behold. The swift, steep decline across all asset classes isn’t only staggering in its impact but is dreadful in what it may portend.

And yes, the Wuhan-originated pandemic has led to the shutting down of virtually all of the world’s economies. That, too, is inflicting damage and is adding tremendous downward pressure to the markets. In that sense, the CCP virus, commonly known as the novel coronavirus, could be making the market crash worse than it might otherwise be.

Or it may not really matter.

Either way, the outbreak of the coronavirus itself didn’t cause the stock market to become as exceptionally overvalued as it was. Nor was the outbreak a factor in making the financial system as unstable as it truly was prior to the crash.

The pandemic was just the catalyst for the collapse, not the primary cause. To say otherwise is like saying that the last snowflake to land on a mountainside covered in 20 feet of freshly fallen, highly unstable snow, caused the ensuing avalanche. Of course, one small snowflake didn’t cause an avalanche, it was just the straw that broke the camel’s back, to mix metaphors.

Similarly, the markets were incredibly unstable well before the pandemic hit. The financial system was already in a highly leveraged and completely unsustainable position. The Dow rose about 10,000 points in the past three years alone. The cyclically adjusted price-to-earnings (CAPE) ratio in 2018 was similar to what it was just before the 1929 crash.

There are many reasons for both of these conditions, of course. The pandemic is much more than a snowflake, but it could have been many different events happening in the world today, from the mass migration of Syrians into Europe to the oil crisis or others.

But for our discussion, the past few and current crises in the markets over the past few decades—2000–2001, 2008–2009, and 2020–202?—have at least some of their causes in two specific developments directly related to the structural changes that were deliberately made to our financial system.

One was the explosion of derivatives, and the other was the repeal of the Glass-Steagall Act.

Detaching Value from Money

Derivatives are a recent development in finance, first appearing in the early 1990s, and are rather esoteric financial instruments. Briefly, a derivative is an instrument or contract involving two or more parties, the value of which is based on an agreed-upon underlying financial asset such as bonds, commodities, currencies, and stocks, among other securities.

Without going too deep into the weeds here, derivatives are highly leveraged instruments, and very distant from the actual, real value of the base asset itself. In language terms, they’re humongous bets that global financial houses make against a market or index or industry “values” and are often fueled by loose monetary policies.

To give you an idea of just how leveraged the derivatives market is today, there are more than $1.5 quadrillion in derivatives contracts in the world economy that generate only $80 trillion in tangible, measurable value in goods and services. These abstractions of money that allow massive exploitation of market prices require massive amounts of capital, and can destroy an economy much like they nearly did in 2008, with collateralized mortgage obligations (CMOs). That’s why Warren Buffett has called derivatives “financial time bombs.”

Mega Risk to Banks

One of the last things then-President Bill Clinton did in office was to repeal the Glass-Steagall Act of 1933. The Depression-era law established a wall between investment and deposit banks to prevent a repeat of the 1929 crash, where banks gambled depositors’ money in the market.

With the Glass-Steagall Act taken away, no such protections were in place, and banks made terrific revenue by selling securities to their depositors, exposing them to market risk. The 2008 collapse was partially caused by the accumulation of capital into securities, driving prices skyward. As stock price rises outstripped value, the conditions were ripe for a market collapse.

Fast forward to 2020, and there’re fewer banks in existence flooding greater amounts of capital into the market and derivatives, both from depositors and from the quantitative easing program from the Federal Reserve. As I noted in an earlier piece, the higher the markets rise, the greater their instability becomes, and the likelihood of a correction grows with each tick upward.

Once again, the markets were primed for a crash. The pandemic was simply the event that triggered it.

A New Beginning?

As I write this, the Dow is hovering in the 19,000 range, down about a third from its high in January. But as the CCP virus pandemic continues to worsen both in the United States and Europe, it’s reasonable to assume further declines in stock values.

It’s also likely that our financial system going forward will be different from what we’ve had over the past few decades.

What will happen to the quadrillions of dollars’ worth of derivatives contracts? Will our financial system continue to be structured around massive debt issues to support stock market values that are detached from reality?

Or will we restructure our financial system closer to a more rational and reasonable relationship to the real, tangible value of companies? Not holding my breath here, but it’s a discussion that must be had if we’re to avoid repeating this over and over again.

But it’s not all doom and gloom. At least, it shouldn’t be. This is still the United States. We’re still the strongest and most innovative economy in the world. What’s more, we’re self-correcting—or, at least, have the ability to adapt our economy and our financial system if corrosive, financial influences are resisted and contained.

But in the context of the derivatives market, we’re also the most highly leveraged nation in the world, and therein lies the problem.

The Epoch Times refers to the novel coronavirus, which causes the disease COVID-19, as the CCP virus because the Chinese Communist Party’s coverup and mismanagement allowed the virus to spread throughout China and create a global pandemic.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.