STRAIGHT TALK
MARK BARNES: Credit default swaps signal dangerous return to debt
'The trouble is that the consumer is anything but ready for a return to increasing interest rates'
Credit default swap bundles make a comeback 10 years after financial crisis, according to the headline on a Financial Times article. A credit default swap (CDS) is essentially an insurance product with which sellers underwrite the potential defaults of issuers for premiums. CDS buyers usually own the underlying debt and are hedging a potential loss from default. Debt issues feed CDS issues, which feed debt issues — that’s how bubbles work. Why, then, when they were seen as central to the cause of the 2008 global financial crisis, are they back in demand? Perhaps it is true, as many claim, that we are programmed to forget pain. I’m not convinced. It may be the post-treatment absence of pain that overwhelms its memory. The euphoria of childbirth, it is said, defeats the pain of labour. The propagation of the human species would seem to endorse that view.And so it is in financial markets — we don’t learn from mistakes. Now that we have survived the fall of the 2008 financial crisis (ha...
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