The House of Representatives passed the Over-the-Counter Derivatives Markets Act of 2009 (the Obama Proposal) on December 11th.  The bill did not attempt to control the derivatives market,¹ but did try to end the "Wild West" or unbounded speculative nature of the derivatives market.  The bill sought to bring derivatives contracts to the light of day (improving accountability and transparency) where money movement could be more easily followed by everyone involved, especially the tax-paying public, which just the previous year had to come to the rescue of improvident "too big to fail" banking institutions.  The bill required very tight reporting standards with the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  It also included compulsory clearing and exchange trading for many types of derivatives contracts; for the rest, it set certain margin requirements (restricting the act of borrowing money in order to invest in speculative markets).  And it restored the prohibitions against federally insured banks (local commercial or depository banks) becoming involved in stock and derivatives trading, prohibitions put in place by the Glass-Steagall Act of 1933 after the great stock market crash, but prohibitions that had been repealed by various financial "reforms" since 1980, ones which had helped to produce the 2008 banking meltdown.

After much debate, the Senate finally passed a somewhat watered-down version of the House bill (thanks to the heavy lobbying effort of the very rich financial industry which did not want to be regulated) the following May (2010) as the Restoring American Financial Stability Act of 2010.  The Senate bill established the Financial Stability Oversight Council whose job would identify risks to the stability of the nation's financial institutions and markets so that future financial melt-downs such as the one of September 2008 could be averted.  On July 21, 2010 Obama signed the bill into law as the Dodd-Frank Wall Street Reform and Consumer Protection Act.

¹Derivatives were speculative bets investors engaged in supposedly as hedges or insurance against future changes, principally drops or unwanted developments in the futures markets – for most anything that can be bought or sold.  This market at the time was huge (still is) – valued in 2010 at around $700 trillion, compared to the world's total GDP or wealth production valued at that time at approximately $70 trillion and America's $14.4 trillion ... or the world's total stock market assets of $30 trillion.

In the meantime, the government's intervention into the American economy increased substantially the public debt, by $1.9 trillion in Fiscal Year (FY) 2009,² and another $1.7 trillion in FY 2010, bringing the total government deficit as of September 2010 up to $13.6 trillion or 94 percent of the nation's total productivity or GDP ($14.4 trillion). This was becoming a very worrisome problem.  The debt ceiling was going to have to be raised.

On Monday, August 1st – because the U.S. government was at the point of reaching its legal debt-ceiling blocking the government from borrowing any more in order to continue its operations – Congress was forced to pass a debt limit-reduction bill.  Also, because the U.S. government was scheduled to run out of funds to pay its debts, it stood to lose its AAA ("risk free") credit rating.

But Republican Congressmen were most opposed to another adjustment in the debt ceiling, whereas the Democrats were heavily supportive of the move.  The Tea Party movement was pressuring the Republicans to stand fast against the rapid growth in government spending and wanted the debt ceiling to hold, and instead cut back on government spending.  It was even standing behind a Constitutional Amendment that would require a balanced-budget (the government could spend no more than what it took in as taxes).

Nonetheless that week the New York Stock Exchange plunged anyway (-4.31 percent).  As a consequence, late that Friday Standard & Poor downgraded the U.S. credit rating from an AAA to an AA+ (the first downgrade ever of the U.S. credit worthiness since the rating went into effect in 1919).  When global stock markets opened the next week, they too took a plunge, especially the Asian markets. Likewise, the American stock exchange also took another huge hit, down 5.55 percent.

There are two figures that are closely watched: 1) the size of the debt itself and 2) the size of that debt in comparison to the nation's productive capacity (GDP or gross domestic product), registered in percentage form.  The latter of the two is the figure watched most closely.

For instance, when Reagan took office in 1981 the debt stood at a little over 30 percent of the American GDP.  But because of tax reduction legislation and a more confrontational approach to international activities than had been the case under Carter, that figure rose to approximately 50 percent of the GDP, and continued to climb under Bush, Sr. to about 60 percent.  It climbed to 65 percent during the early years of Clinton's presidency, then began a strong decline, backing down to about 55 percent of GDP at the end of his presidency in 2001.  Then under Bush, Jr. it climbed once again to over 60 percent, but with the corporate financial rescue and "buy-out" legislation enacted in the very last months of the Bush, Jr. presidency, left Obama facing an inevitable very sharp rise in the public debt, which within a year of the Obama presidency reached over 80 percent of the American GDP.  But then it kept climbing, reaching well over 90 percent when the 2011 crisis hit.

At that point the government debt stood at around $14.5 trillion, and the debt ceiling was finally raised to $16.4 trillion in 2011, although the government debt quickly reached that figure by the end of the following year (December 2012). Finally Congress simply agreed to suspend temporarily (2013), then once again (2014) and again (2015) and again (2017) the debt ceiling or debt limit.  By the end of Obama's presidency, the debt had reached nearly $20 trillion, or 104 percent of America's annual GDP.

In the past, the public debt was composed mostly of private or personal loans in the form of government bonds, particularly important during the war years of World War One and World War Two, when it became a patriotic duty of Americans to purchase what were termed "war bonds."  But over time such private or personal ownership of the debt died away.  As we have already noted, the Department of the Treasury instead "borrowed" money from the huge Social Security Trust Fund (where people's retirement money they had been taxed during their working years was then supposedly deposited, and awaiting them upon retirement). In the end hitting the Social Security Trust Fund for loans ended up with the Trust Fund owning fully one-half of the national debt.  In short, the Social Security Trust Fund found itself holding a massive amount of "IOU" notes rather than actual financial assets, and thus cash payments tended to be distributed to Social Security pensioners from the moneys flowing into the Trust Fund from younger, working contributors, sort of a giant governmental Ponzi Scheme!³

This of course created great concern, with Baby Boomers entering retirement age in the 2010s in large numbers.  How secure was the Trust Fund?  How long before it might run out of money to make Social Security payments to a rapidly increasing number of Boomer pensioners?

As we have also already noted, another quarter (or more) of the debt was owned by foreign countries, most notably China, holding over $1 trillion of the debt obligations, and Japan close behind with $1 trillion in holdings (each at this point about 5 percent of the total of the American debt).  With Japan having its own financial debt problems, calling in that American debt would present a huge problem to the American Treasury.  And China could possibly use that debt for political purposes of its own, to pressure America on points of contention between the two countries.

But no one seemed to know what to do – or simply was not really interested in doing anything at all – about this rapidly-rising problem, a problem eventually (2017) waiting for Donald Trump (and the Republican Party with a majority in both houses) to figure out a solution (maybe).

²A Fiscal Year (FY) runs from October 1st of the previous year to September 30th of the named FY year.

³Named after Charles Ponzi who, in the 1920s, operated a scheme to lure investors into a supposed investment pool in which "profit" payouts to investors were not from the earnings of any real investment assets (those had been long cashed out and thus no longer existed) but only from money coming in from new investors joining the investment pool.  It was pure fraud.