As I pointed out recently, I first wrote about “credit default swaps” in February, after becoming convinced that, though I don’t completely understand them (and maybe nobody does), that they are a bad thing indeed. In the post to which I’ve linked I noted that AIG, the big financial player that is probably going to collapse next, is in trouble because of credit default swaps. I find today that these swaps both contributed to Lehman’s collapse and will be a prime cause of market fallout resulting from Lehman’s collapse.
One might be interested therefore, in finding the person responsible for these instruments and doing one of two things with him: 1) Draw and quarter him; or 2) Make him the next treasury secretary. This being the United States, which do you think is the most likely?
And what role does [Phil] Gramm have in the current banking crisis? As David Corn reports today, when Gramm was the Republican chairman of the Senate banking committee, he was an anti-regulatory crusader whose actions blazed the trail for the sub-prime meltdown:
[E]ight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm’s legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions.
As Bloomberg reports this morning, the unregulated market for swaps is at the heart of the Lehman failure.
It is widely expected that Gramm will be McCain’s treasury secretary. This is of a piece with the way in which things work in Washington. You are not a serious thinker about Iraq unless you had a major role in creating and supporting the Iraq disaster. Only those who have been consistently wrong are believed to have sufficient expertise to solve that crisis. It stand to reason, then, that the person who created the conditions that led to an economic disaster should be in charge of fixing that disaster. As always, of course, like with his Iraqi-expert compatriots, he will admit to no prior error and will his prescription for recovery will be more of the same. Paul Krugman says Gramm is just the man to lead us into a depression, but what does he know? A man whose been consistently right has no credibility in this country.
UPDATE: Apparently AIG’s collapse is imminent.
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