Credit Default Swaps: In Common Dog Sense

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For those following the current economic credit crisis, the term ‘credit default swaps’ has become a central issue. But, if you are like me, it is really tough to get a good handle on all of this.

The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. “It could be another — I hate to use the expression — nail in the coffin,” said Miller, when referring to how this troubled CDS market could impact the country’s credit crisis.

But, I just came across a very cool post (ht to that detailed explaining this financial mess to your dog. It comes from Physics Professor Chad Urzel’s blog which “features physics, politics, pop culture, and occasional conversations with his dog”. Do check out The Kibble Bubble!

Let’s say you have a whole bunch of kibble–”

“How much kibble?”

“I don’t know. A lot. Fifty cups.”

“Oooh! I like how this starts.” She wags her tail excitedly.

“You won’t like how it ends. Let’s say you have fifty cups of kibble, and the Weimaraner across the streets comes and asks you to loan her one cup, and promises to pay you back five cups over the next year. Do you give her the kibble?”

“No! It’s my kibble!” She looks offended at the very idea.

“It’s only one cup, and she’ll pay you back five.”

“Yeah, but I don’t trust that dog. Where’s she going to get five cups of kibble? She’s just going to eat the one cup, and I’ll never get paid back. She’s a bad risk.”

“Exactly. Now, imagine that some human comes and offers to sell you a piece of paper for ten cups of kibble, and the paper says you get fifty cups of kibble over the next year. Do you buy it?”

“Sure. Humans have lots of kibble. They’re good for it.”

“You might think that . . . . .”

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