Warm Southern Breeze

"… there is no such thing as nothing."

Credit Default Swaps: Why should they be outlawed?

Posted by Warm Southern Breeze on Saturday, March 6, 2010

Credit-default swaps – where you insure your neighbor’s house just to destroy it and make money from it – that’s exactly what we have to curb.”

How dangerous is it for money traders to take bets on, and therefore exploit, a nation’s budget deficit or any other fiscal crisis?

Regarding the quote, if you guessed that Harry Reid, President Obama, Janet Reno, George W. Bush, Hilary Clinton, Madam Speaker Pelosi, Newt Gingrich, or any other American politico said that, you’re wrong.

In fact, Bloomberg Business News service reported that German Chancellor Angela Merkel made those remarks in a Berlin press conference Friday, after meeting with Greek Prime Minister George Papandreou, specifically in context to Greece’s fiscal woes.

Merkel, you will recall, was the woman whom former U.S. President George W. Bush felt up… er, rubbed on… er, rubbed against… er, “gave an unwanted impromptu shoulder and neck massage” at a pre-summit meeting of the G-8 nations hosted by Chancellor Merkel in her home region July 13, 2006.

Saying further that derivatives traders “must be curbed,” she added that, “We must succeed at putting a stop to the speculators’ game with sovereign states. We can’t allow speculators to be the profiteers of Greece’s difficult situation.

Paul Volker, speaking in Berlin to the American Academy called for tighter regulations on derivatives in American financial markets saying, “Surely the recent revelations about the use and abuse of complex derivatives in obscuring the extent of Greek financial obligations reinforces the need for greater transparency and less complexity.

Mr. Volker served as chairman of the Board of Governors of the Federal Reserve System under presidents Carter and Reagan, and now serves as chairman of the Economic Recovery Advisory Board under President Obama.

Saying that it is necessary to “corral the excesses in the derivatives markets,” he called for “system-wide surveillance, backed by clear legislative directives and authority,” limits on bank size, and bans to prevent banks from creating hazardous trade.

American lawmakers are scrutinizing the role that Goldman Sachs Group may have had in Greece’s debt crisis, considering specifically if credit-default swaps aided and abetted in concealing the size of Grecian deficit. Goldman Sachs assisted Greek officials raise $1,000,000,000 (one billion) of off-the-books funds in 2002 specifically through credit-default swaps, and did so without EU regulators’ knowledge.

While some German politicians have publicly called for Greece to sell some of their islands, Papandreu nixed any suggestion, and Merkel rejected the idea out of hand saying, “Selling the islands is out of the question,” and noted that no member of the German government had proposed such an idea.

She also specifically mentioned credit-default swaps as large sources of Greece’s fiscal problems and said that Greece “has not asked for any financial support,” or requested a bail-out from any European Union member nations.

Greece’s Deficit to Gross Domestic Product ratio is currently 12.7, and Greek government officials have reduced spending 4% to much public outcry and demonstration.

American Deficit to Gross Domestic Product ratio is 10.64%.

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