As I understand it, Credit Default Swaps and the like are built on debt and leverage, similar to how the banking system practices fractional reserve banking. Neither of those 2 practices would be allowed on a free market because. Fractional reserve banking is nothing less than legal counterfeiting in today’s world and it would seem to me that CDSs fall into the same category.
Call it regulation if you want, but it seems to me like mere prevention of fraud. And if that’s the case, there’s nothing laissez faire about it. A free market implies protection against fraud and crime and protection of property and contracts. I don’t see how anything that breaks with that definition of a free market can be considered laissez faire.
As far as I’m concerned, Greenspan was no libertarian. I mean he was the chairman of the federal reserve which has a monopoly on money and credit.
We had financial meltdowns long before fractional reserve banking, so that is not the only culprit. I don't see how we can get rid of the Fed now, but I do think it needs to be subject to much tighter rein regarding creation of money. But there still needs to be adequate regulation regarding reserve requirements. Credit default swaps are basically a form of insurance, but AIG was not required to keep adequare reserves against them largely because they were exempted from regulation by Phil Gramm's legislation.