Red Adair, the only solution for derivatives market
Myron Scholes, intellectual godfather of the credit default swap, says blow ’em all up
Red Adair put out oil well fires by setting off gigantic explosions at the wellhead. “My belief is that the Fred Adair solution
is to blow up or burn the OTC market in credit default swaps,”
Instead of doing what Scholes, the father of LTCM, suggested, we continued to feed the monster through bailouts, QE1, QE2 lite,
and QE2. Until the outstanding contracts are neutralized, the markets will remain a delayed time bomb waiting to explode
as soon as the Fed stops the flow of liquidity. If the Fed keeps printing and kicking the can down the road, the imbalances
and blowups that follow will only get worse.
It seems nationalization and/or cancellation and strict regulation of these contracts is the only solution, similar to treaties
and nuclear arms agreements between countries with nuclear weapons. These are financial WMD, tied to real dynamic
markets, they should be handled in a similar fashion.
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