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Credit Default Swaps – Too Little Too Late

The horse is long out of the barn, but Congress may soon step in to correct this problem with credit default swaps.

S. 961, introduced just yesterday in the Senate, would authorize the regulation of credit default swaps and other swap agreements.

Really super – now that the market for credit default swaps has collapsed in an unruly heap.

But it’s not just that Congress has been behind the gun. Congress has done affirmative harm in this area. Let’s take a look at the tape:

In 2000, Congress passed a law barring states from regulating credit default swaps under their gambling and “bucket shop” laws. This set the stage for the market in derivatives, including credit default swaps, that have been a big part of the economic meltdown. That’s what credit default swaps are – side bets that allow people to wager on financial outcomes without having to buy assets.

We gave more background and listed the Members of Congress that allowed this to happen, were still serving, and were up for election last November here.

There are two choices to make in regulation of financial services: Either leave it unregulated – buyer beware (and buyer’s will be wary – it’s not a ridiculous idea) or regulate it uniformly. You can’t leave credit default swaps – essentially a form of gambling – unregulated but still looking like a financial service. That’s a sort of fraud on the public, perpetrated by policymakers. Thanks, Congress, for coming in after the fact to mop this up.

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