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

Xavier Méra (1)

1 GRANEM - Groupe de Recherche Angevin en Economie et Management

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.

Mots clés: credit default swap; debt accumulation; speculation; fiat money; sovereign debt; contract theory; libertarianism; Rothbard

Domaines: Economies et finances; Droit

Xavier Méra. Credit Default Swaps, Contract Theory, Public Debt, and Fiat Money Regimes: Comment on Polleit and Mariano. Libertarian Papers, 2013, 5 (2), pp.195-218. ⟨halshs-00851723v2⟩