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.