Wednesday, March 11, 2009

I Rarely Agree With...

...Paul Krugman, but he has a really good point here:
Has the risk of a US government default risen? Probably. Nonetheless, the people buying these contracts are crazy. A world in which the US government defaults would be a world in chaos; how likely is it that these contracts would be honored?
Indeed. The whole premise of a Credit Default Swap being paid if the U.S. sovereign debt fails is another example of a hocus-pocus financial product. That is to say, it may exist (and even be bought) but it does not exist as a transactable event in any real sense.