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Credit Default Swaps, Contract Theory, Public Debt, and Fiat Money Regimes: Comment on Polleit and Mariano

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  • Xavier Méra

    (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)

Abstract

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.

Suggested Citation

  • Xavier Méra, 2013. "Credit Default Swaps, Contract Theory, Public Debt, and Fiat Money Regimes: Comment on Polleit and Mariano," Post-Print halshs-00851723, HAL.
    • Handle: RePEc:hal:journl:halshs-00851723
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00851723v2
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    References listed on IDEAS

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    1. Duffie, D., 2010. "Is there a case for banning short speculation in sovereign bond markets?," Financial Stability Review, Banque de France, issue 14, pages 55-59, July.
    2. Kevin Dowd & Martin Hutchinson & Gordon Kerr, 2012. "The Coming Fiat Money Cataclysm and the Case for Gold," Cato Journal, Cato Journal, Cato Institute, vol. 32(2), pages 363-388, Spring/Su.
    3. Stulz, Rene, 2010. "Credit default Swaps and the Credit Crisis," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 157-175.
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    5. Ashcraft, Adam B. & Santos, João A.C., 2009. "Has the CDS market lowered the cost of corporate debt?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 514-523, May.
    6. Xavier Méra, 2013. "Comparative Advantage and Uncertainty Bearing," Post-Print hal-00840231, HAL.
    7. Hirtle, Beverly, 2009. "Credit derivatives and bank credit supply," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 125-150, April.
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