Knowing When to Give Up

Via John Cole, this discussion between Byron York and Matt Taibbi is entirely full of win. He takes York apart. Apparently, York either doesn’t understand or is unwilling to admit that credit default swaps are at the heart of the financial crisis. I guess he should have listened to last week’s This American Life. I did, and it really helped clear things up for me.

In short: a credit default swap is a kind of insurance program that traders buy. You can bet against a company defaulting. So, let’s say I own stock in a company, and I want to protect myself from loosing all of my money if it goes bust. So, I buy a CDS and if that should happen, the people who insured me give me that money. The thing is: Phil Gramm deregulated the CDS market in 2000. Anyone could buy them, even for stocks that they didn’t own. It would be kind of like me taking out a life insurance policy on my neighbor, hoping that he dies. The CDS market was about $62 trillion dollars. That’s five times the New York Stock Exchange – and when AIG failed, all the guys who had money on AIG to fail wanted to collect – from people who didn’t have any money to give them. Hence: collapse.