How can there be enough money to pay for credit default insurance if the general rate of interest is too low to cover the risk of the loan?

How can there be enough money to pay for credit default insurance if the general rate of interest is too low to cover the risk of the loan?
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1 Answer

Answer :

It has to do with fractional reserve banking and the extensive “money”(whatever that is) which is created by selling debt. Debt multiplies money held in reserves. The actual worthless paper dollars created are actually quite minimal compared to the money in circulation. A creditor’s value is actually established by the debt they create. We imagine they are assuming a risk like we are which is far from the case. Their asset is our debt. It sounds absurd (which it is to everyone but the banker) but the only value passing hands at all is the labor we extend to discharge this debt. They just need to establish the value of their debt as fairly stable by credit rating. I don’t know for certain but I imagine their debt is insured by the same companies as the bank. Companies like AIG.
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