This kind of regulation would clearly bracket the potential of the derivative market in CDS's but housing is such a broad sector that the number of people with direct exposure could certainly make for a viable market, regulation notwithstanding. Market collapse is unlikely.
Spreading risk is generally a good thing but its folly to argue that excessive speculation doesn't also create a moral hazard, its why you can't take out life insurance policies on strangers.
The industry has forfeited the right to make its own decisions.
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