Thursday, February 25th, 2010 | Author:

If I were a gambler, I’d be taking bets that sooner or later the debt-ridden American economy will collapse.

If I were in a position to influence that collapse, I’d be a rich woman.

This, according to the NY Times, is what’s currently happening to Greece.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

It’s  universally accepted that debt is required for people or businesses or nations to function, but with every loan the borrower gives up a certain measure of freedom.  I think it’s better to do without.

The rich rules over the poor,
And the borrower becomes the lender’s slave.

(Proverbs 22:7)

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Category: debt, economics
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2 Responses
  1. Jim Wetzel says:

    It’s universally accepted that debt is required for people or businesses or nations to function …

    True … and anytime something seems “universally accepted,” chances are excellent that it’s wrong, wrong, wrong. Like the idea that debt is a necessary thing: wrong.

  2. akagaga says:

    And because we want it now, we give up more of our freedom. Somehow that doesn’t strike me as a reasonable trade-off.