Daily Kos: Rolling a Hard Six with the Economy

by Devilstower

Sat Apr 12, 2008 at 10:11:00 AM PDT

I usually leave the technical economic stories to more fiscally knowledgeable editors (and considering the state of my checking account, that would be everyone). But here's a story on which I feel I can write with equal authority to those who account for every last penny, because in this story no one knows what's going on. Not me. Not economists. Not Ben Bernanke. Not even the investment bankers involved in the story. Certainly not the government, because -- as part of the worship of free markets -- this is an area that's completely unregulated.

It's called credit default swaps. Just defining a credit default swap can be difficult, but here's my best shot. When you buy one of these things, you're buying a level of protection for an investment. For example, say someone has some double-yuck rated bonds, and is concerned that these things may soon be worth as much as a Zimbabwean dollar. With the right credit default swap, you can pay out a small amount over time to ensure that the the bonds still pay out close to face value in case of a default. So, in a sense, a credit default swap is insurance you buy for a risky investment.