Some comments here have put the onus for the current banking and credit crisis on bad mortgages given to poor people or Barney Frank. The real cause of the crisis was the extensive use of an unregulated insurance-like financial derivative called a credit default swap. The best explanation I have come across is in this three part series from Money Morning. (Part 1, part 2, part3) The extensive use ...
of these instruments lead many to predict that they would be the downfall of the financial markets this spring when the extent of the subprime loan crisis became apparent. An explanation of how the subprime scam worked can be found (Warning-this link contains crude language)here . See here, here and here for articles which predicted or explain why this crisis occurred.
Thursday, October 30, 2008
Credit Default Swaps and the collapse of credit
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5 comments:
great article and resources!!
Jesse W.
http://www.subprimeblogger.com
I have read similar articles elsewhere and tend to agree this is one of the major issues involved with the current meltdown. However, this ponzi scheme started with people purchasing mortgages they knoew they might well not be able to afford. I'm not sure you would have one without the other and vice versa.
Forgot to add that Mr. Frank, in his position as chair of the banking committee did not raise any red flags while this scheme built and built. It is true that many other politicians were complicit in their silence on this howver Mr. Frank's steadfast refusal to accept any responsibility at all in the matter is problematic for me.
Ahhh, credit default swaps, what a scam. This would be similar to someone letting me take out insurance on my house for 40 times its value. What a shame, my house just burnt down. Oh no, the insurer can't back the claim. Whew, the government is going to bailout the insurer with tax dollars. That was close.
They basically took out insurance in case financial intitutions failed, then shorted the crap out of the financial institutions until they did fail.
Wall Street is a joke. It's not about adding things of value to the economy. It is about making things as complicated as possible so business people can try to screw each other. Now the taxpayers are left holding the bag. Our legislators don't even understand the business model so there is no hope of proper regulation. This will all happen again.
I have to agree with anonymous that Barney Frank, being the chair of the oversight committee for Wall St is partly to blame for this. One man can't move mountains but I certainly never heard boo from him until after the scheme blew up and everyone was paid off. Now that he is up for re-election and it is too late, he is screaming from the rooftops as if he understood the whole thing and how it would play out from the beginning. Sorry Barney, I'm not buying it.
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