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Bill Moyers talks with Gretchen Morgenson about the financial crisis and its likely return

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There is some language about how we could "unwind' these entities and vague talk about how we could be better prepared, and how we would be vigilant in watching for trouble on the horizon. But no one is saying, "Let's take firm steps to make sure we do not get in this position again. Let's just never again let these banks, these institutions get to the point where they can threaten the entire financial system."

How about what Warren Buffett called financial weapons of mass destruction, i.e. credit default swaps and other complex derivatives. What's been done to disarm those threats?

Very little. As you know, credit default swaps were central to the failure of AIG, central to the now $180 billion taxpayer "backstop' of that huge insurance company. This was a company that, with nowhere near the capital necessary to cover them, sold insurance policies to banks guaranteeing them that if mortgages and mortgage securities failed, they (AIG) would compensate them for such losses. http://en.wikipedia.org/wiki/Credit_default_swap

AIG received regular payments (premiums) from those banks, for the insurance policies they had sold, and were essentially betting a huge amount of money that the insured mortgages would never fail. Well, that was the wrong bet to make, as we now know. And then the taxpayer and the government had to step in and "unwind' all of those very complex transactions. You would think that after such a costly fiasco, Congress would take steps to make sure it could never happen again. But you would be mistaken to think that. And who knows where we're going to end up, with regard to what the final cost will be for the taxpayer.

You would think that lots of people might demand, "Hey, wait a minute, let's make sure that this doesn't happen again. Let's make sure that these credit default swap insurance policies can't just be bought and sold in the dark, which is exactly how they are still sold! -- between two parties, privately. Let's make sure they're at least traded on an open and public exchange, where other people can see them, where their prices can be tracked, where investors can properly assess the risk. If one company is doing too much of that kind of business, the exchange would indicate that to one and all. Investors would see that and would be able to invest more prudently."

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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