Junior Ganymede
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The insurable interest doctrine and financial derivatives

January 15th, 2013 by Vader

What’s wrong with our financial markets.     

In particular, a rule known as the “insurable interest doctrine” — which first entered British law by an act of Parliament in 1746, and then became a part of the common law inherited by the American legal system — required that individuals seeking to buy insurance have a stake in the event against which they sought to be insured. A person could not, for instance, purchase a life-insurance policy to bet on the death of the prime minister, but he could purchase life insurance to protect his dependents or buy health insurance to protect himself. The aim was to prevent people from disguising gambling as legitimate insurance transactions: The rule allows a person to enter the insurance market to protect himself against financial loss, not to enable him to reap a windfall from a random event. If this rule had been applied to credit default swaps — which are mostly used to gamble on the failure of a debtor rather than to insure against it — the enormous multi-trillion-dollar CDS market would never have formed, and the financial crisis would not have been as severe.

This is fairly new to me, so you must forgive me my naivete if I am overly enthusiastic about this idea.

I do find interesting a secondary notion that comes into this essay only to support the main argument: Gambling should be forbidden because gambling erodes the legitimacy of wealth and property rights. I cannot but think of my state lottery.

His Majesty: “Lord Vader, I am surprised at you. Gambling on the death of a sovereign? I’ve had you Force-choke people for less obnoxious forms of lèse majesté.”

Comments (3)
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January 15th, 2013 10:07:00

January 15, 2013

“Compare this situation to an ordinary transaction in the real economy—say, when a buyer hands over a dollar to a seller in exchange for a tomato. Each party prefers what he receives, producing a net social gain.”

I say, Vader, old boy. I know it’s America and all, and all that, but are the chappies on the other side of the pond really paying a whole dollar for a tomato and thinking themselves better off for it? Seems a rather stiffish price to pay for pelting a well-deserving politician. Dashed near a tax on democracy.

But then I never could get the hang of those blasted currency conversion rates. Does one buy tomatoes by the pound or by the guineau?

Pecos Bill
January 15, 2013

“Like a lot of well-intentioned reform legislation with limited grounding in economic theory, Dodd-Frank is tremendously vague and flexible.”

I’m just a plainspoke hombre myself, so I most likely would have worded it somewhat like “Dodd-Frank is a mealy-mouthed mess of lawmakin’ by folks what don’t know their butt from first base when it comes to dealin’ with money what didn’t come from lobbyists.” But then I’m like to be kind of blunt.

And I reckon you could pave yourself halfway to Las Vegas with them intentions anyway.

January 15, 2013

I pointed out to His Majesty that the gist of the article is that gambling on the death of sovereigns ought not to be permitted.

He replied that sedition ought never to be formally outlawed. Doing so merely warns the rebels how you plan to identify them for subsequent processing.

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