What is the cause of the current crisis? Easy money, speculation and poor analysis of the fundamentals.
Why were interest rates for companies so low in 2007? Easy money, speculation and poor analysis of the fundamentals.
Why did house prices rise so much in America and around the world? Easy money, speculation and poor analysis of the fundamentals.
Why were Greek interest rates so low? Easy money, speculation and poor analysis of the fundamentals (and outright government corruption).
But no-one was complaining when equity markets were going up too much, when the CDS market was pushing interest rate spreads to unrealistically low levels. Or when people were pushing house prices to unrealistically high levels. And nothing has been done to stop any of this happening again. No-one has proposed making it illegal to lend more than 80% of the value of a house, or launching an investigation into how Greece lied for so many years about its debts or whether the Central banks held interest rates too low for too long or whether bank supervision needs to be revised and improved (Basel III is useless if the same people who did not oversee Basel II properly are still in charge).
Instead the EU government has proposed banning naked CDS trades.
1. The CDS spreads are a symptom of the crisis, not the cause. Where is the evidence that speculation is causing the spreads to widen rather than government incompetence? For example, Bafin, the German regulator, said there was no evidence of speculation in CDS against Greece – http://www.bafin.de/nn_720788/SharedDocs/Artikel/EN/Service/Meldungen/meldung__100308__cds__spekulation__en.html
2. If the governments had actually regulated the CDS market, we might actually know what is going on. There is no centralised clearing party for CDS trading, no centralised market, no idea of how much volume is really being done. Everything is traded through the global banks. How about regulating these activities and making them transparent? It does not help to ban certain uses of an instrument if you have no actual idea about who holds them, who uses them and how they use them in the first place.
Banning naked CDS positions is just another way of distracting from the major cause of the current problems. It is not a solution to the core problems we are facing, namely too much debt and too high obligations, and, importantly, will do nothing to stop them recurring in the future. If the CDS market is saying you have a problem, keeping it quiet does not mean the problem does not exist, it just means you ignore it for longer.