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Professor Richard Portes on Banning Naked CDS

In a hard-hitting article Professor Richard Portes, takes issue with the role of the naked CDS market:
“The most obvious argument against naked CDS is the moral hazard arising when it is possible to insure without an ‘insurable interest’ – as in taking out life insurance on someone else’s life (unless she is a key executive in your firm, say).”

While acknowledging the need for financial innovation he raises questions about the fundamental value of some aspects of financial development:

Like almost all the financial innovations in recent years, naked CDS are said to be a beneficial move towards more complete markets. And speculation, we are told, is essential to the proper functioning of markets. This is simply market fundamentalism that ignores masses of research on destabilising speculation as well as a key lesson of the financial crisis, that some innovations have been dysfunctional and dangerous

Professor Portes’ article comes at a time when a number of observers are asking searching questions about what society wants from its financial system and also at a time when several policy-makers are concerned about an attitude in the financial system which seems to expect a return to business as usual. He recommends banning naked CDS but he also sees the difficulties in achieving this end:

Banning naked CDS will require common action in the US and the EU, but the political environment is right. We should not lose this opportunity.”

  • Link to full article which originally appeared in EuroIntelligence

Richard Portes is Professor of Economics at the London Business School and President of the CEPR. The views expressed in this article are not necessarily those of the ICFR.