Live Blogging at the Dodd-Frank Symposium: the Effects of Credit Derivatives and Leverage in Facilitating Asset Bubbles

(click here to see the full abstract of Mr. Erik Gerding’s presentation at the Symposium) Hedging provides financial institutions with an important tool for spreading risk and consequently provides greater liquidity for the market (at least in certain asset classes). However, the money multiplier effect that results from chains of credit default swaps, when combined with the use of leverage, can create conditions that facilitate asset bubbles. Recognizing these conditions is essential to properly identifying and correcting and smoothing out future “boom-and-bust” cycles in the financial markets.