Okay, let's talk about money... again. A couple weeks ago I had several posts that discussed our financial crisis and how we could refocus our efforts to bring prosperity to every one. The one thing that I knew little or nothing about was something called Credit Default Swaps. This is a $45 trillion market (that is trillion with a capital "T.")
Now, everyone knows how insurance basically works. I take out an auto insurance policy. I pay an insurance company and they assess the risk of me driving a car and getting into an automobile crash. If my risk is low, I don't pay all that much. If my risk is high, I pay a lot more or I become uninsurable. Suppose, on the other hand, you want to take an auto insurance policy out on me. You don't know me. You have no financial ties to me but to think that I am a safe "bet" and therefore you really would like to take insurance out on my driving. You would need to be able to find a third-party like AIG to give you such an insurance policy or a Credit Default Swap.
This is basically what happened on Wall Street. In 2000, a lame-duck Congress passed legislation which allowed these Credit Default Swaps to become legal. What was that old saying, "Those who don't know history are destined to repeat it." (Edmund Burke). In 1907, many states and Congress moved to outlaw the practice. (This is why I totally reject the idea that someone like Joe the Plumber or Sarah Palin should be in charge of anything. We need smart people who understand where we are in history. It's nearly impossible to know where we're going if you don't know where we've been. Palin and Joe have no clue.) Why did Congress outlaw this practice? A run on banks in 1907 caused a near collapse of Wall Street. People had these betting parlors and they were betting on stocks without owning stocks. (watch the 60 minutes video below)We had multiple opportunities to intervene in this legalized gambling. Yet, we have this or had this ridiculous notion that the markets will correct themselves. This is just one piece of the puzzle. It is a $45 trillion unregulated piece of the puzzle. Do we really need Credit Default Swaps?
Some great articles on this: NPR, Time Magazine and NY Times
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