A great article explaining the risk in Greece. Love the analogy to taking an insurance policy out on your neighbor’s house and setting up an incentive to burn the house down! Insurance was intended for protection of assets and property NOT the creation of a whole new class of investments unrelated to the insurable interest! You have NO interest in your neighbor’s property and therfore should NOT be allowed to set up an insurance policy against your neighbor’s home (asset). Much in the same way that your pension plan, or government funds should not be able to “invest” speculating on whether or not Greece will default on their public debt. Your pension plan has no insurable interest in Greece’s financial failure or success.
But the returns are significant when these “bets” are stable and the world is hooked. Fancy investments where there is no insurable interest are purely financial speculation. ”Creative” investments are held off the books and unregulated. Think Goldman!
The problem is bigger than Greece, could spread to Italy, Spain and Portugal. The firestorm of default could begin in Greece and emulate the Sept. 2008 meltdown. Greece is small so it might seem easy to ignore. But let’s not forget the contagion from the Lehman collapse that spread throughout the financial system in the U.S.
Biggest problem here, nobody is exactly certain who is holding these instruments, it’s like a flu when the defaults begin. Can spread uncontrollably. Just like 2008, these gambles will be backstopped by public money. Ask yourself, if you could walk into Vegas with a bank roll, when you lost your money the government would pay you back, how often would you try your luck at Vegas? That’s what is going on with Credit/currency Default Swaps, high gain…little risk with government entities willing to bail you out when you lose. It all boils down to greed.
http://www.cnbc.com/id/35580694
FINALLY Bernake thinks this deserves some “checking into” HIGH TIME!
http://www.msnbc.msn.com/id/35582624/ns/business-stocks_and_economy/
