Sunday, September 28, 2008

Background On Credit Default Swaps


There's a really great article running on Newsweek on the history of the credit default swap, the instrument that ultimately got us into the fiscal calamity that has us teetering on your actual brink.

They even cover that "tranche" is the French word for "slice".

There are two thoughts that have crossed my mind about this whole mess.

One - maybe the Muslims are right that lending money for interest is inherently evil. Not for the reasons that they think, but, say, for the sake of simplicity, if you lend someone $100 and ask for $110 at the end of the year, where is that $10 going to come from?

Yes, pretty much, no matter how you slice and dice it, you're going to have to print that $10, so now $110 is worth the same as $100 was a year ago so you didn't make anything anyway.

My great-great grandfather was right - the credit system is a curse - not only to the buyer but to the seller as well.

The second thing is that no one can predict the future. Oh, you can try - you can come up with huge actuarial tables based on the past experiences of thousands or millions of people and make a good ATTEMPT at pricing risk, but, guess what - just about every time if you wait long enough some new variable will enter the situation and all your old statistics will end up utterly worthless.

Yep ... we're in bad, bad trouble, boys and girls ...

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