Thursday, February 11, 2010

Fed should crush speculators who threaten U.S. credit rating



The U.S. can't default. It's impossible. As a currency issuer it can just "print" money to pay debts. Yes, you can have a discussion as to whether or not that will create inflation, but default is out of the realm of possibilty. It's impossible.

However, that does not prevent clueless speculators from betting that it can and driving up the spreads on Credit Default Swaps.

The Fed needs to put an end to this now.

What it should do is be an open-ended seller of CDS in unlimited size. Take the opposite side of these guys' trades and crush them. The U.S. is not going to default and the Fed can write the check so it wouldn't be a problem, but it would eliminate any possibility of CDS market manipulation being a factor in the ratings agencies' decision making of whether or not to downgrade. I know in the past they have used CDS market behavior to change credit ratings. Specs are aware of this and routinely manipulate the CDS market to achieve their malevolent acts.

4 comments:

Mike Sandifer said...

I'm reminded of what the government did to Arthur Anderson after the Enron scandal. Yes, it was a completely unnecessarily draconian act, but should these major credit rating agencies really still exist in their present forms? Shouldn't there at least be laws to forbid them from getting paid by the entities they rate?

BTW, I'm all for crushing the speculators in this case.

Tom Hickey said...

Good opportunity instead of crushing the speculators is just to eliminate the CDS market. If CDS is permitted, it should be considered insurance and regulated as such.

CDS in monetarily sovereign debt is just bogus anyway. It should just be done away with.

This is a good chance to got after the rating agencies too. They were at the heart of the GFC. Couldn't have happened as it did through securitization without their collusion.

Steve B Wise said...

I think we would all agree that the financiers of the world have way too much influence on Gov'ts - let alone economies.

Regulation would be nice if it was enforced. We've seen how good the SEC has been at staying ahead of the game.

Phillip said...

Mike, you are being too kind. They should be hung for treason - at least if they are US citizens.