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Find a way to invalidate credit default swaps

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News - Hugh's Views

Written by Hugh McManus

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What's happening now is what I feared could occur.   The credit markets are perilously close to completely seizing up; stock markets are plummeting and will likely continue to drop unless governments step in and demand a time out.  As I see it, there's only one solution. Think about what's happened: under the Housing and Economic Recovery Act earlier in the summer raised the debt ceiling by about $800 billion and authorized that spend.  The Fed over the past few months has infused hundreds of billions into the system, with an additional $600 billion a few days ago.   Here's the scary thing, when the Fed most recently offered $600 billion, it did nothing to dollar denominated LIBOR interest rates--really scary.  The Fed invested $80 billion into AIG.  The President just signed into law a bill that increased funds by $700 billion.  By any estimate approximately $1 to $2 trillion has been made available into the system and it is still seizing up.   There are no more options in the bag of tricks of monetary policy (the Fed); there are really no more serious options that the Congress can do with Fiscal policy.  The system is in real danger. On 60 Minutes, I heard that credit default swaps would be regulated as insurance instruments, with all the capital requirements implied therein, had the word "insurance" been used instead of "swap."  In essence, it's a distinction without a difference.  Here's a simple solution: the Federal Government--an agency of the government--should determine that they're insurance contracts that are improperly constructed and, therefore, canceled. The credit default swaps are at the core of this problem.  The default rate in the US is under a $1 trillion.  The CDS market is over $60 trillion--however that figure is measured.  The CDS market needs to be culled. < Prev   Next >