Credit Default Swaps Are Not the Problem

The OTC derivatives market had a rough two years in the press. It started off with simply blaming the entire crisis on the OTC market. That was fashionable for a while, but it turned out to be total nonsense. So the new face-saving gloss is to distinguish between causation and severity: you see, the OTC market didn’t cause the crisis, but it did made things worse.  It seems this equally ridiculous claim isn’t enough for the press, given the latest hail storm of nonsense accusations. For after all, there is still plenty of ad revenue to be generated with rabble rousing, uninformed commentary on buzz words. So what’s the latest theory? It’s two fold. First, the CDS market is “opaque.” Second, speculation is rampant, rampant I say! And it’s adversely affecting asset prices outside the CDS market. Below I address the first prong of this theory, and show that not only is the CDS market relatively transparent, but that it generates more useful information than the bond market.

Understanding Custom OTC Derivatives

Most OTC derivatives are highly standardized, heavily traded products that are more fairly described as unfamiliar than complex.  Nonetheless, a small corner of the market comprised of customized, or bespoke,trades has captured the imagination of both the public and the press. The descriptions put forth to date muddle the scale of the market, purportedly in […]

Asset Bubbles and Economic Activity

The internet economic debate du jour is summed up nicely by economist Paul Krugman as follows here: why [doesn’t] a housing boom — which requires shifting resources into housing — … produce the same kind of unemployment as a housing bust that shifts resources out of housing. And here: why … isn’t [ there ] […]

Naked CDS: Exposed

The term “naked CDS (Credit Default Swap)” has been tossed around a lot lately, with little to no examination of the etymology of the term. You may have heard of “naked short selling” of stock, and a bit of Google action will tell you that naked short selling is generally illegal. So, you’d be inclined […]

Understanding The OTC Derivatives Market

In 2006, few people outside of the derivatives market had used the word “credit default swap” in casual conversation. By 2008, it had become an inescapable household term. People continue to throw around buzz words gleaned from the pink pages of the FT, but as my colleague, Daniel Indiviglio recently asked: Does anyone out there […]

Hey Financial Times, Get Your Derivatives Lingo Straight!

Also published on the Atlantic Monthly’s Business Channel.Yet another news organization has mangled Tim Geithner’s plan for over-the-counter (OTC) derivatives. This time, it’s the Financial Times. A few people at the FT have done a great job covering derivatives, particularly Gillian Tett and the folks at FT Alphaville. But the FT article in question makes […]

Could Government Intervention Help Markets Function Better

If free markets never fail, there’s no inherent need for government intervention, though we might object to the resultant wealth distribution on moralistic grounds. But if markets do occasionally fail, then it’s possible that government intervention could be used to realign incentives, and “nudge” the market to a higher order equilibrium. View From An Ivory […]

Boring Banking Will Not Save You

Paul Krugman wants us to believe that by making banking boring again, we can prevent another crisis from occurring in the future. Although Krugman doesn’t provide any clear definition of what it means to make banking boring again, the context suggests that he is pushing for a return to a simpler and smaller banking sector. […]

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