Tuesday, March 17, 2009

AIG, etc.

Today is Tuesday, 17 March 2009.

What is a credit default swap?

“A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults.” (Wikipedia)

Currently, many political figures are raising cain over the fact that billions of taxpayer dollars provided to stabilize (“bail out”) the insurance giant AIG have gone to make good on credit default swap contracts with major banks and various American state governments. This is at best ignorant foolishness, and at worst destructive cynicism.

Unless one has a practical roadmap to replace the current global monopoly capitalism structure with socialism at one fell swoop, the CDS contracts must be honoured.(Though a good case can be made that payouts should contractually be at less than 100%.) Were the contracts cancelled or be allowed to fail, they would severely damage or bankrupt banks all over the world, leading at best to chaos and depression, and at worst to the outright collapse of the global financial system.

As a democratic socialist, I despise and condemn in the strongest possible terms such inherently toxic financial constructs as credit default swaps. However, the fact remains that, unless one intends to plunge the world into nihilism and widespread civil disorder, resulting in pandemic violence and famine, there must be an orderly, and costly, unwinding of such contracts. This is the poisoned legacy that predatory monopoly capitalism has bequeathed. The whiners should have thought long ago about the consequences of allowing financial institutions to create exotic financial instruments without stringent oversight and regulation.

The same holds true for the $165 million in AIG bonuses. Again, I'd vastly prefer that these had never been contracted, however ... do we really wish to confer upon the President and his myrmidons the power to extra-legally cancel contracts? For example: cancel the contracts between 401(K) owners and financial companies, and annex the holdings to the U.S. Treasury? (Something similar happened recently in Argentina.)

The sad fact is that most of those who praise monopoly capitalism to the skies are either woefully ignorant of the realities of the system, or grossly misinformed. Until the majority of citizens educate themselves in those realities, and act on knowledge, not emotion or false ideologies, we will continue to struggle in a shit storm of our own artifice.


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