No. of Recommendations: 13
The government can't cancel existing contracts. That's the law. But they can begin to mitigate the problem by restricting CDS insurance only to actual owners of bonds, and only for the par value of the bond. That isn't anywhere near happening.

===================

Great explanation.

In the larger picture, the more I think about this, the more I believe CDS instruments should be banned, even for actual owners of bonds. The presence of CDS instruments only abstracts away the analysis of risk that must be the first order factor in any decision to borrow and lend money. If you're lending money and worried about the borrower's ability to pay, raise the interest rate to collect more up front while the borrower IS making payments to compensate you for the risk they might eventually stop or DON'T LEND THE MONEY.

One may think it serves some higher purpose for expanding growth and economic activity when things are going relatively well and predictably but the presence of CDS type securities actually accelerates the creation of phantom money. THAT is the root of the entire problem.


WTH
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement