Robert F. Engle Quotes
I think the credit default swaps can take the place of the rating agencies who really have missed the ball in this procedure and are quite conflicted by the way the ratings are paid for. So, I would like to see credit default swaps become an evermore important way of understanding credit risk in the economy.
Engle, Robert F. Interview. Big Think, Freethink Media, 2010.
It was the souped up nature of the credit default swaps that was in part responsible for the souped up melt down of the economy of 2008 and the great recession thereafter. A credit default swap is an insurance policy that a company will pay off its bonds and not go bankrupt. It is a cross between an insurance mechanism and a stock exchange type security mechanism and through heavy lobbying escaped any kind of regulation. It cost a company no money to write a credit default swap and they were paid to do so. As long as business and the economy was good, it was a terrific business but there was no way of ever knowing how much risk they were taking. So companies who wrote credit default swaps did not have to have the money to pay to back them up if they business was bad. When that happened in 2008 even the largest insurance company in the world collapsed because of the risk of having to pay the credit default swap and the U. S. Government had to take over the insurance company. In 2010, the Obama administration passed a financial reform bill that began to regulate credit default swaps.
Robert Fry Engle III is an American statistician and the winner of the 2003 Nobel Memorial Prize in Economic Sciences, sharing the award with Clive Granger, "for methods of analyzing economic time series with time-varying volatility (ARCH)".
