Credit Default Swaps, Contract Theory, Public Debt, and Fiat Money Regimes: Comment on Polleit and Mariano
Libertarian Papers 5 (2): 217-239, 2013
24 Pages Posted: 8 Jun 2015
Date Written: August 16, 2013
In this paper, I show that Polleit and Mariano (2011) are right in concluding that Credit Default Swaps (CDS) are per se unobjectionable from Rothbard’s libertarian perspective on property rights and contract theory, but that they fail to derive this conclusion properly. I therefore outline the proper explanation. In addition, though Polleit and Mariano are correct in pointing out that speculation with CDS can conceivably hurt the borrowers’ interests, they fail to grasp that this can be the case only in some peculiar circumstances that I identify. In other words, they miss the bigger picture, the one outside special circumstances, in which CDS trading has the opposite effect. That is, CDS facilitate debt accumulation, including government debt accumulation. Finally, I point out how this can precipitate the collapse of fiat money regimes. An incidental goal of the analysis is to provide a better account than Polleit and Mariano of recent government interventions in and around CDS markets.
Keywords: credit default swap, debt accumulation, fiat money, speculation, sovereign debt, contract theory, libertarianism, Rothbard
JEL Classification: D84, D92, E42, E44, E62, E65, G13, G28, H63, K22, P16
Suggested Citation: Suggested Citation