Libertarian Papers

by Thorsten Polleit and Jonathan Mariano

Abstract: In the so-called “international credit market crisis,” which started in the second half of 2007 in the US subprime mortgage market, financial derivatives, most notably credit default swaps (CDS), have been publically blamed for having caused, or at least aggravated, the economic and monetary debacle. However, sound economic analysis reveals that CDS are fully compatible with the principles of the free market, and that CDS are not to blame for the disintegration of credit markets—with their tumbling banks, struggling private borrowers and increasingly overstretched government finances. CDS are instruments which are fully compatible with Rothbard’s libertarian property rights and contract theory—and thus economically and ethically legitimate. CDS are an efficient and effective instrument for putting an end to ever higher debt accumulation under fiat money regimes. Economic and ethical fault is to be found with fiat money rather than CDS.

Erratum:

On page  14 of the manuscript,

“This, in turn, increases the disciplinary pressure on borrowers, who are about to build up unsustainable debt levels, to consolidate; or it makes borrowers, who have become financially overstretched, go into default.”

Should read:

“This, in turn, increases the disciplinary pressure on borrowers who are about to build up unsustainable debt levels to consolidate; or it makes borrowers, who have become financially overstretched, go into default.”