***Debt, Derivatives, SPEs, SPVs, and SUVs
It's quite possible that much of this credit has been effected because of a single faulty premise. If you think that's not possible, let's remember it was a very short time ago that almost the entire internet bubble was brought about by the single flawed premise that advertising would cover the costs of running a web site. Sure, you had some retailers and other businesses trying to sell stuff, but by and large everybody thought they could provide content for free, and make money from advertising. Almost everyone involved with the internet believed that faulty premise.
Where credit creation is concerned, that flawed premise may be the concept of financial insurance. Of all the "financial insurance" products, credit insurance is among the most worrisome. Think of credit insurance as being a bit like co-signing on a loan. If the borrower can't pay, you're on the hook. It would obviously be much riskier to cosign for an irresponsible teenager than for a reputable, able, qualified borrower. However, able borrowers obviously don't need a co-signer.
But Wall Street would have us believe something different. They would have us believe that you can take a bunch of sub-prime auto loans, consumer loans, or mortgage loans, etc., place them into an SPE (Special Purpose Entity) or SPV (Special Purpose Vehicle), slap a credit insurance product on them to turn them into AAA-rated paper, and the risk is somehow hedged away and just magically disappears into the system.
This is nonsense. I contend that not only is credit insurance not an insurance product, but the risks cannot be hedged away, and, in fact, the very existence of such "financial insurance" products is almost destined to bring about the very type of conditions that will expose their speciousness.***
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