Thank you for this site. It’s helpful in trying to understand this crisis. I’m sorry to beat a dead horse but in your response above, group (a) did not apply to Jae In’s question. I tend to agree with Blackeyebart.

If the swaps for speculators only were canceled, and premiums were forced to be paid back how is that worse than what is currently going on? CDS for interested parties could endure and be regulated as insurance.

The government has been pumping money into banks. If they cancel the gamblers’ swaps, couldn’t they put the infusions into the banks who are hurt by having to pay back premiums?

I don’t understand how the CDS are just a sideshow if they’re valued at 60 Trillion, several times the value of the real economy (as I’ve heard?). And because of their not being regulated they are hidden. How does investor confidence truly return when people don’t know what kind of side bets these banks have? Our government can’t infuse enough money to pay off the bets. Seems helping the premiums be paid back would be cheaper.

There is something fundamentally wrong with our economy being brought to its knees because of gambling. It needs to stop- CDS should not be allowed for uninterested parties. Vegas casinos would have never been so stupid. Leave the gambling to them.

This consumer doesn’t trust Wall Street at all and I won’t as long as this shadow system continues. And this is the system where for years we’ve been pinning our retirement hopes. How does consumer confidence return when so many have job insecurity? My job at a small business is tied to the construction industry, retailers are closing everywhere, so many jobs tied to the auto industry in danger.

With stagnant wages, pinning the hopes on consumer confidence seems a hopeless business. The economy has to contract.

I apologize if this sounds like a rant. I’m just an average person trying to understand what’s going on. Hopefully you can answer my questions about the CDS.

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

http://research.stlouisfed.org/fred2/fredgraph?graph_id=10715&category_id=0#

Link is to a graph of the US monetary base over past decade.

http://research.stlouisfed.org/fred2/fredgraph?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=1000&height=600&bgcolor=%23CC6600&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s1id=BOGAMBNS&s1transformation=lin&s1scale=Left&s1range=Custom&s1cosd=1990-01-01&s1coed=2008-1

The second problem is that these contracts are still being created. In crisis gamblers gamble.

So we can’t go forward or back and we can’t offer a solution to the problem, and we are are waiting for consumer confidence to return?
Might be a long wait.

How can this hurt people on both sides of the transaction? Because the risk of default now is greater than when the contracts were signed, group (a) loses: imagine homeowner’s insurance has skyrocketed in price, and your insurance company arbitrarily cancels your existing policy. Group (b) should win in the long term, you would think, except that they can’t come up with the cash in the short term.

Even if you limit group (a) to people who speculated using CDS, you have the same problem: institutions whose current financial position depends on their ability to collect on those CDS and who could go bankrupt without it. Effectively the government would be just taking money away from them.

Oh, and I don’t think it would help at this point. CDS are largely a sideshow at this point. The big problem now is that consumer demand has fallen off a cliff, and even if you could magically eliminate the problems created by CDS that wouldn’t help consumer demand.

Wow, that was fast! Is there any way such actions can help subprime borrowers?