Wall St is in love with "hedges". As in hedging your bets. At Vegas, the hedger at roulette bets half his money on black, the other half on red. Spin the wheel, and doesn't matter which color comes up. You win one, you loose one, and you don't loose all your money. Of course you don't win much, but it's "safe".
On Wall St, they like to speak of credit default swaps, and puts and shorts and such as "legitimate hedges" as opposed to outright gambling. Clever brokers invent complex plays which preserve value no matter which way the market moves. They buy credit default swaps on shaky bond issues. The small cost of buying the swap guarantees the bond buyer against loss, if the bond defaults, the credit default swap pays off and makes the bond buyer whole.
This isn't what the market is supposed to do. The market is supposed to route investment money into winning enterprises and shut off credit to loosing ones. Economic growth, and jobs come from funding winners, not pouring money into losers. The bond buyers should be buying bonds from companies that will make enough money to pay off the bond. But with a hedge, a credit default swap, the buyer can buy high yielding bonds issued by losers and buy a credit default swap to cover the risk of the bond defaulting, which it is likely to do as soon as the loser loses big enough.
This is diverting valuable investment capital into losers. Is there any rational reason left to permit the sale and purchase of credit default swaps?
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