Some fear that if the economy weakens, a swap crisis could produce a global financial meltdown. In an article in London’s Financial Times on January 28, Partnoy warned, “Few people are confident that banks have accurately assessed the risks associated with the $45 trillion of credit default swaps.”
Some pooh-pooh pessimists such as Partnoy. One Little Mary Sunshine is Alan Greenspan. In his best-selling book The Age of Turbulence, published last year, Greenspan lauds credit default swaps for taking all the risk off banks and spreading it around to other institutions such as insurers and pension funds, thus avoiding “cascading defaults of an earlier era.” Unlike critics such as Partnoy, Greenspan says, “In today’s world, I fail to see how adding more government regulation can help.”
This year we may find out who is right.