Instead of demanding higher wages as profits increased, Americans took easy loans. Without the wages to pay off these loans, they went into default and were packaged into the CDS market. (Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default.) They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. If bond insurance disappears or becomes too costly, lenders will become even more cautious about making loans, and this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools. THIS IS BAD! Real bad….
NEW YORK (Reuters) – The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a “potential breaking point” in the global economy that will “disrupt the “current dollar-based credit system””, PIMCO’s Bill Gross, manager of the world’s largest bond fund, said in his monthly letter to investors….. .