http://blogs.wsj.com/economics/2009/08/21/should-the-fed-get-into-the-cds-business/
Exotic financial instruments known as credit default swaps played a central role in the crisis that brought the U.S. economy to its knees last year. Ricardo Caballero and Pablo Kurlat, two M.I.T. economists, have an audacious response: The Federal Reserve itself should get into the credit default swap business to prevent the next crisis.
Their proposal will be debated today at the Fed’s annual Jackson Hole, Wyo., symposium by the world’s leading central bankers and economists. Harvard’s Kenneth Rogoff, former chief International Monetary Fund economist, will present a critique.
A credit default swap is an insurance policy for financial storms. A firm selling a swap — a hedge fund, an insurance company, a big bank — promises the buyer that it will be repaid if an underlying debt defaults.
