With its latest bank bailout plan, the U.K. government has gone headfirst into the credit-default-swap business, a product that helped destabilize the financial system in the first place.
The Treasury will insure banks against a wide range of risks on their balance sheets, from residential mortgages to leveraged loans, regardless of the currency in which it is denominated.
That is a big gamble. If it fails, the consequences for the U.K. economy will be dire.
The bet is that insuring against future losses makes them less likely to materialize.
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