Everyone dealing with the area of finance should be able to understand this Post; if one does not, they need serious help. I am against naked credit default swaps simply because any spread of Risk beyond the initial Players can only threaten the greater economy. CDS in no way affects the actual rates of default in finance, and naked credit default swaps transplant the Risk to previously healthy sectors of the economy. It would not make a difference except that these Swaps alter the nature of the Risk as well, in fact increasing the structural overhang. Higher risk options are funded at greater Risk, with a higher rate of default because of the Risk; but with no corresponding increase in the Returns demanded, always and eventually leading to a greater loss of capital without a correcting Return. I may have even confused myself here, so I will simply say that the Recovery schedule of capital accumulation has not been strengthened though the Risk has been magnified. I will state for Those still confused that We have left entrepreneurial Risk, and have entered into economic Risk; meaning that capital replenishment can not be accommodated by normal Profits, but only by economic Profits.
The Reader may ask Why I think the previous paragraph ideation is such a big deal. Economic Profits must insist upon economic injury to other sectors of the economy, who cannot draft a repayment economic Profit from their own Production. Two Conditions are created: the first consisting of a reduction of normal Profits in associated sectors; the second being a collapse of the converted sector when the economic Profits are forestalled. Both Cases lead to a loss of Productivity in the long-term at a greater rate than normal operations. This is Why there should be a complete ban on naked credit default swaps, and even high restriction in covered credit default swaps. Borrowers should not be allowed to Buy or Sell such Swaps, and Lenders should be allowed to sell such covered Swaps only to financial institutions who loan within the sector of Production.
I am not claiming any great skill within the area, but it is also clear that relatively no one else is asserting such Authority. I am simply trying to cut Fire-breaks around the forest of such activity which will limit exposure to the specific sectors involved. The result will save Us all from the perpetual Risk which must descend upon the greater economy. This means normal Production will not be under continual pressure from all sides from the use of credit default swaps. Sectors may fail in sequence like they always have, but not with catastrophic failure as is now existent. lgl