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Okay. Jeff used this blog to write about sports once, so I’m going to write about credit default swaps. This is the beauty of having a blog; no one has to read it!
The New York Times’ website is currently hosting an article entitled ‘Traction for Banking Regulations,’ which states that, ‘The prospect of a financial regulatory overhaul’s passing Congress brightened on Thursday.’ To say the least, the fact that an initiative like this is taking so long to gain support is really scary and absurd.
I really like the metaphor that a number of publications have used to describe credit default swaps (taking out an insurance policy on your neighbor’s house) and would like to play around with said metaphor for a minute.
Let’s say that you live on a suburban street in an alternate universe in which the house insurance industry is wildly deregulated. You start hearing rumors about a guy named Bob, who lives a couple blocks away. Your neighbors have been talking about how Bob supposedly spends a lot of time in his garage, performing strange scientific experiments; these experiments apparently cause smoke and explosions, and basically seem like major fire hazards. Because you live in a weird alternate universe in which the house insurance industry is wildly deregulated, you come up with a devious plan: you are going to take out an insurance policy on Bob’s house, in order to potentially receive a big payout from the insurance company if Bob burns his own house down. ”Genius,” you tell yourself. ”I can’t believe that I’m the only one who thought of this.”
(From here, the metaphor gets even ricketier. If you’ve read this far, I commend you. Please bear with me!)
A week later, Bob sets his house on fire. It’s not a huge, blazing fire, but the roof of the garage is being nawed at by a small cluster of flames. Bob heads across the street to ask one of his neighbors, Joey, for help. Joey comes to the door and finds Bob in a state of panic. Bob hasn’t been paying his water bill, so Bob needs Joey’s help putting out the fire. ”Can you get me a bucket of water to help me put out this fire?” Bob asks.
(We are also assuming that there is no fire department in this universe. *sigh* I know. Please stay with me.)
Joey’s basic sense of human decency compels him to help Bob, so Joey heads to the back yard to fill up a bucket of water while Bob waits on the front porch. As you may have predicted, Joey is just like you: he took out an insurance policy on Bob’s house because he heard the rumors about the experiments. So Joey can’t help dragging his feet; he fills the water bucket slowly, and he doesn’t fill it all the way to the top.
Bob takes the water bucket across the street and dumps it on the flames. Because the fire has had time to grow, and the bucket of water is not completely full, Bob is unable to exstinguish the the fire with Joey’s offering. So, Bob heads back across the street again, this time to a guy named Gerard’s house. As Gerard heads to the back yard to fill up the water bucket, he experiences the same internal conflict of interest that Joey did; Gerard also has an insurance policy against Bob’s house.
(Again, the metaphor is wonky here, but the basic idea is this: because so many of Bob’s neighbors have taken out insurance policies against Bob’s house, Bob is having a hard time getting the water he needs to put out the flames. All the while, the fire is growing.)
Another, crucial detail about the alternate-universe-suburb in which you live: the neighborhood lawns are covered in a unique kind of grass that is extra flammable. Which means that, if Bob’s house burns down, the fire could easily spread to neighboring houses. The fire won’t necessarily hurt you, because you live a couple blocks away from Bob, but it could definitely spread to Bob’s neighbors.
So yeah. You’ve probably figured out that Bob is Greece. Sorry about my clumsy metaphor; I’m no Wharton scholar. But seriously, I don’t understand why people aren’t freaking out about this. Maybe it will all blow over, like the whole Dubai thing seems to have? Only time will tell.
-Warren
