Posts Tagged ‘Economics’

Can I take out an insurance policy on your house?

21 October, 2008

You know, just in case it burns down? I’d quite like to make some money out of it if that happens?

Of course, I wouldn’t be allowed to. Shouldn’t be allowed to. However, I can’t quite get over my amazement that something very like this is allowed in the financial markets, and the industry opposes any regulation.

If you haven’t heard, a Credit Default Swap is essentially an insurance policy that Company A can take out to protect its investment in Company B. However, people who have no interest in Company B have been being allowed to take out these policies. In effect, this amount to a bet that Company B will go bust.

This, alongside other financial instruments such as the Contract for Difference and Financial Spread Betting turns the stock market into a bigger version of William Hill’s. Rather than a way for companies to raise much-needed capital in order to produced the necessities of life, it becomes primarily a way for a few to make obscene amounts from producing nothing.

This is Capitalism, and each time we have a few years of relative stability, the clever economists explain how we have left the bad old days of boom-and-bust behind us. And each time we enter a new crisis they greet it with disbelief.

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