Browsing through John Taplin’s blog, I came across the following reference:

RTFA: http://www.nytimes.com/2009/01/25/business/25gret….

Mr. Raynes’s resolution is more radical: unwinding all outstanding credit-default swaps through a process he calls inversion.

Under this plan, insurance premiums would be refunded to buyers of credit protection from the entity that wrote the initial contract. And the seller would no longer be under any obligation to pay if a default occurred.

The premium repayments would be made over the same period and at the same rate that they were paid out. If a contract was struck three years ago and charged quarterly premiums, the premiums would then be refunded quarterly over the next three years.

Mr. Raynes’s proposal would treat hedgers – buyers who bought C.D.S.’s to protect themselves because they actually hold the underlying debt – differently from speculators who bought C.D.S.’s simply to bet against a troubled company.

Those guys, the gamblers, would receive only the premiums they paid to an insurer. Hedgers would have their premiums refunded, in addition to the difference between the underlying debt’s face value and an independent assessment of its intrinsic value.

For mortgage-related securities, this value would be ascertained by third-party analyses using loan servicing data on delinquencies, defaults and performing mortgages.

“If you stop the clock and reverse it, then the entire system will be able to breathe again,” Mr. Raynes said. “And over time, at the same speed that you got into the mess, you get out of it.”

Taplin has the following to say about it:

I like this idea because it unwinds a completely dangerous business that is used by speculators to launch their bear raids on banks using little or no collateral. Estimates are that half of the $30 trillion in CDS contracts would cancel each other out (offsetting bets). That still leaves $15 Trillion that no one has. Raynes idea of simply cancelling the contracts and returning the premiums is the only way out.

I’m not sure why this is the only way out, but there is a certain straightforward elegance to the proposal that really appeals to me. Essentially, the more that can be driven algorithmically, the less that can be short-sold by speculators. FTA, this all comes down to companies insuring debt-defaults for way less than they should have. After all, does it really matter if you can pay the claim later when you’ve gotten the money up front? In this case, the answer is no: plan B is the bailout.

RTFA: http://jtaplin.wordpress.com/the-cost-of-empire/

It is of course one of the defining articles of faith of the conservative movement that Reagan militarily spent the Soviets into bankruptcy. But it is a Big Lie. Of course the Soviet economy was a hollowed out shell in 1989, but it also held an extrordinary number of assets including one of the world’s largest oil reserves and an well educated work force. Freed from the need to compete in an arms race, the Russians were able to turn their talents to business. Today, the Russian central bank and the Central Bank of China, our other cold war foe, now control over 20% of the U.S. Treasury debt, and we control none of theirs. Exactly who spent who into bankruptcy?

Interesting point, but Taplin’s essay is LOADED with many such insights. This is well worth the read, although you won’t find some magic-bullet solution in the closing paragraphs. Consider these details, and arrive at your own conclusion.