Closing the Casino
David Cay Johnson has a great piece on a simple approach to closing down Wall Street’s casino.
A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.
Quoting Republican academic Lynn Stout, he makes the point:
“Derivatives are gambling,” she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. “They are a zero-sum game in which one side loses the bet and one side wins,” Stout said.
That would be one good approach to create a disincentive the Wild West saloon approach to the derivatives market.
Derivatives, as we have seen, have a long history of being damaging to society and offer little benefit.
Hand in hand with restoring New Deal-era regulations to the financial markets, adopting that time-tested legal principle would go a long way to restoring some fairness and balance to this country.
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