Credit Default Swap (CDS) - The general public finally awakened to this beast when
AIG had to be bailed out in Sep. 2008. Much had been discussed about the complexity of these "financial instruments" and the instability they brought to our banking system. So I was surprised to hear my husband mention yesterday that CDS are still being traded in high volume in the financial sector.
I'm not in the financial sector, so this felt like a disturbing news given the damage; I assumed it would be eventually be banned or heavily regulated, but since they're still around, I thought maybe they have a real function.
The conversation went something along this line. It may sound like a dialogue between a 5-year-old and 40-year-old.
I ask him: What's the purpose of the CDS? Shouldn't they have been banned? Do they actually have a good purpose?
He says: It's supposed to serve as an insurance for your investment.
I: But don't we have something called an insurace?
He: Yes, but you cannot buy insurance on bonds or other investments, since it's risky.
I: Why would you want to insure your investment in the first place?
He: So that if the company that issued the bond goes under, you don't lose all your money.
I: But saved money is supposed to be an insurace for the the times you cannot make money, no?
He: Yes, but it could lose value because of inflation, so you need to protect your money.
I: So you have to do it because everyone else is doing it?
He: Yes, but it's also much more complicated than that.
I: So it's just a way to make more money from money.
He: Yes, but who will lend money without interest? Bonds are important because it encourages people to lend money, and it gets the credit market flowing.
I: So the reward for lending money is the interest for risking your money?
He: Yes.
I: Then why are you allowed to buy insurance when you are doing something inherently risky? Aren't you already getting the reward for the risk?
He: It gives you a protection in case something disasterous happens with the compnay.
I: But it doesn't make sense that people are allowed to buy protection for something they are knowingly taking a risk. Why should you be paid interest then? Isn't this just another way for people who already have money to make more money, because it protects them, but doesn't protect the people who cannot afford it?
This went on for about 10-15 minutes, my poor husband who is caught in an endless rant from a disgruntled wife.
Does anyone else see the nonsense in calling credit default swap an 'insurance'?
Comments (3)
I see the nonsense, though it's not nonsense to those who thought up the scam and profited so handsomely from it. In your dialogue, I find myself wondering who is the 40-year-old and who is the 5-year-old.
I wish you and I could have conversations like the one(s) that you and your husband have, Grace.
The rich have always wanted to have it both ways. They want the freedom to pursue their dreams of wealth without restriction or regulation. But they also don't want to lose their money. So when it suits them, they want the government (i.e., the taxpayers) to step in and assume the downside risk by helping them with bailouts, loan guarantees, tax incentives, and the like. And they've usually gotten their way....which is what lobbyists are all about.
A corporation's or rich capitalist's ONE narrow purpose is to make money for the owner(s), so they just keep applying pressure by any means necessary until they get what they want. Ordinary citizens, on the other hand, are motivated by many things, pulled in many directions, and they don't have the time or energy or money to fight the corporations/capitalists day in and day out. Even the strongest of them eventually get worn down.
The media, which are owned by corporations or rich capitalists, function as propaganda tools, telling us that black is white and white is black until many of us begin to believe it. The propaganda machine has gotten incredibly sophisticated over the years. They usually succeed in blaming the victims for the problems that are in fact systemic, inherent in the very nature of the capitalist system.
@Eccentrique - haha, my husband hates these dialogs!
I get confrontational and emotional, and he's just the opposite type, so he gets flustered and annoyed by my rants. I also make him the target of all the country's ills for being the only white male in the room.