I disagree. Wallt Street has proven it cannot be trusted with derivatives, CDOs and credit default swaps. They need to be limited and regulated and put on an open exchange. Not traded in the dark OTC style
I don’t believe in totally unregulated OTC markets in CDOs and CDS. We still have those markets by the way
Aside from all that, yes the Fed created a bubble via too low interest rates
“I disagree. Wallt Street has proven it cannot be trusted with derivatives, CDOs and credit default swaps. They need to be limited and regulated and put on an open exchange. Not traded in the dark OTC style.”
Opposing the manner of trading, is not the same as claiming that by nature a certain financial instrument is or was the problem.
Even many in the financial services industry have before and in larger numbers recently proposed the “clearing house” idea for trading CDOs and credit default swaps. It won’t change the basis of what they do (financial insurance) or how they do it (the risk calculations). It will help improve the “market” pricing of them, resulting, most likely, NOT in fewer of them but in buyers paying a possibly more realistic price for them. To the extent that more open pricing mechanism makes a better actual balance sheet for financial outfits, and others, that will be a good thing.
Regardless, even had that mechanism been in place, that transparency of trading CDOs and “swaps” WOULD NOT HAVE CHANGED THE DESTRUCTION IN THE UNDERLYING VALUES PRODUCED BY THE TIPPING POINT CREATED BY THE EXCESSIVE VOLUME OF SUB-PRIMES IN AN EXCESSIVE VOLUME OF MORTGAGES CREATED BY THE HOUSING MARKET BUBBLE.
SMEs were MADE attractive, and seemingly financially a good deal, by the Fed’s cheap money, low interest rate policies; NOT by the mere existence of the SME type of investment or the mere existence of CDOs.
The same Fed policy, running unchecked, destroyed the attractiveness of SMEs when the bubble the Fed created burst. None of which was due to the existence of CDOs and how they were traded. The inherent “leverage” in the system was made possible by the Fed’s policies, not by the use of CDOs. They simply put to use the inherent “leverage” (attractiveness of borrowing in dollar-denominated terms) that Fed policy created.