From the ‘why we’re fucked’ file, here’s a great little sample from a lengthy thread over on metafilter covering what’s up with credit default swaps:

20Rafaelloello, yes, that is true, but as I understand it, most holders of CDS have them hedged off to someone else. …”

In (most?) lines of insurance you cannot take out a policy unless you have an insurable interest in the asset or life. In CDS’s there was no requirement of this.

Somebody buys Rafaelloello’s mortgage, they want to hedge that risk with a CDS, fine.

5,000 other investors say, “Hey Rafaelloello hasn’t missed a mortgage payment, I want to “insure” that he continues to pay.”

Then 5,000 more say, “I’ll take that bet, because even though it looks like he’s going to continue to pay, I can hedge my bet that he wont…” Enter the next 5,000 “investors”.

Before you know it, Rafaelloello is the equivalent of a top-ranked college athlete. Tens of millions of dollars are being bet on my ability to perform, with no direct ties to the underlying assets (My home and my ability to pay).

You’re only hedged as well the ability of all parties to pay their bets/bookies/vigs obligations. In this ring of hedges it only takes a player or two to skip town and the whole game implodes.

The rest of the thread is over here, and it’s well worth a look if you’re trying to grok what’s going on with the financial system. I’ll repeat my oft repeated assesment though – in layman’s terms, it was a giant fucking ponzi scheme.

Here’s my take on how the debate went last night. Imagine the following exchange:

Ifil: Next question. Governer Palin, you first. Can you explain to us how you would bake a chocolate cake?’

Palin: Sure, I’d be happy to. Let me tell you about the time I was at the game with the hockey moms, and I sucessfully negotiated for cheaper hot dog prices for all the kids from the vendor at that stadium. It just goes to show how my experience as an executive demonstrates my experience! And did those kids enjoy those hot dogs? You betcha!

Ifil:… Senator Biden? Would you like to respond?

Biden: …err… [big fake smile, demonstrating he thinks Palin’s charming] well, back in PA, my mom made the best chocolate cake, and let me tell you how, but before I do, let me just mention that John McCain voted against chocolate cake 37 times since he’s been in the senate….

God help us if the Republicans take the White House again. Everyone’s giving Palin credit today for not blowing it, but I’m completely appalled that anyone could watch last nights exhange and continue to count Palin as a credible candidate. I got up this morning and did the same thing I did after watching the last debate: went over to the Obama campaign’s website and donated $100 to their campaign. Here’s hoping they win, we’re all in deep shit if they don’t.