The goverment can't see into the future. How is the government supposed to know what companies are doing behind the scenes? What schemes they're concocting? Credit default options is one of those schemes.Government is perfectly capable of asking economists and psychologists what incentives a possible change in law or policy will create.When California was drafting its "deregulation" of it electrical-power network, economists looked at the draft and predicted a number of abuses that would be perfectly legal under the proposed new rules and would create severe financial difficulties for California utilities. They enacted the law anyway. Those abuses occurred and several California utilities had severe financial difficulties.When Obamacare was being drafted, people looked at pieces of the draft as they were released and predicted that medical-care insurance prices would rise and doctors would retire at a higher rate. Some went so far as to predict that a lot of part-time employees would see new limits on the hours they would be permitted to work and some full-time employees would be forced to either go part-time or find new jobs. That's happening.It doesn't take a Ph.D in economics to determine that if you demand banks make mortgage loans to people who don't meet normal lending criteria, the banks will be making lower-quality loans and more of those loans will go into default. Or that the additional money flowing into mortgages will drive housing prices up. Or that the bankers will seek ways to protect themselves from the mortgages they wouldn't have made on their own by foisting the risk off on someone else (and preferably getting that someone else to pay them for the privilege). But the government failed to make any allowances for these entirely predictable things.
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