As debate on the Wall Street “Reform” bill winds down in the Senate, Sen. Byron Dorgan (D-ND) is still pushing his ban on “naked” credit default swaps.
We warned that the idea wouldn’t work. Now we have some real world experience with just such a proposal: Germany banned the practice in German financial markets Tuesday night, and stock prices fell in Germany and worldwide.
Observers called the German ploy “an act of desperation and a refusal to address the fundamental problems at hand,” and warned that the move could cause trading in swaps markets to freeze up.
Swap prices are a symptom, not a cause of credit problems. Restricting markets will not solve economic problems in the US any more than they did in Germany.