Credit Default Swaps and the Subprime Mortgage Disaster
(Best Syndication News) There was a time when the US dollar was worth a trillion German marks. It was a hard time but the Germans pulled through. Maybe we should study how they corrected that situation.
Now at more than $45 trillion, we have a tsunami of destruction that started some 10 to 20 years ago. Wall Street agents invented Credit Default Swaps, an unregulated way to insure financial instruments such as municipal bonds and mortgage securities. Like a popular game in Vegas, the use of Credit Default Swaps expanded into other more risky obligation.
Agents buy and sold the same paper in a variation of the old Ponzi scheme. The insured would certainly be informed about where to send his premium payments, but after 10 or 20 sales of his “policy”, he may not know where to collect when his investment goes sour.
It is like buying a fire insurance policy from a company that can sell it to just about anyone. It put play money into our economic system. The guys that profited most took the money and ran. We had fun spending some of it but the party is over.
To save the banks, President Bush told us we must pay an enormous tax obligation: 700 billion dollars. We have no idea how long it will take to pay it off. President Bush did not explain what happened. He only pointed to “greed” as the culprit. What’s new! “Greed” needs restraints and regulation because people will eventually “Game the System”. But Greed is fundamental to our system. Boom and Bust is also fundamental to our capitalistic system.
We have all seen the line graphs. These two fundamentals require thoughtful planning and evolving rules. Financial papers insured not to fluctuate downward demonstrate a lack of understanding of the system and the overwhelming exploitation by Greed shows the need for constant oversight.
The bank bail out idea didn’t work for President Hoover some 80 years ago.
There is less reason to believe it will work now. We could buy the entire stock market twice and have a trillion left over with this 45 trillion dollar house of cards. This fiasco cannot be braced up with 700 billion dollar more debt and taxes.
By Allen Wilson