Kevin B. O'Brien <[EMAIL PROTECTED]>
> Now, most decent spreadsheet programs will not let you get away with
> this circular reference, but an unregulated market can. Essentially, it
> all came down to a shell game where everyone was insuring each others
> risks, and then convincing themselves that they had laid off the risk
> this way.
I think it is more complicated than that. A derivative market ("insuring each
others risks") can be relatively stable, given an adequate framework. Look
at the stock options market, which is organized by the Options Clearing
Corporation that guarantees the contracts and imposes margin requirements.
There are similar organizations in place for various Futures markets.
In contrast, the market for credit default swaps (CDS) has no centralized
clearing organization. No one can be sure that the CDS counter-party
will pay off if the credit event occurs. I think this played a significant part
in the instabilities last week.
Too bad the government isn't doing anything to encourage the creation
of a centralized clearing organization for CDS's.
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