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Banking on Failure

Speculators’ Use of Credit Default Swaps to Bet on Others’ Misfortune Is Unseemly, Dangerous

Nov. 11, 2011 — Betting on the misfortune of others has an unsettling quality to it. It just feels wrong. Under our current financial regulatory regime, speculators freely gamble on businesses failing and countries defaulting. In addition to its unseemliness, betting on others’ failure poses a grave risk to our financial system. Drawing on research from Levy Institute scholars Marshall Auerback and L. Randall Wray, “Banking on Failure” examines how speculators use credit default swaps to bet on others’ misfortune and the dangers that result from such activity. This report also proposes policy solutions to mitigate the dangers created by credit default swaps.

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