Many of us talk alot about derivatives (see this) . You might think that we are too obsessed about the role of derivatives, including credit default swaps, in the economic crisis.
Moreover, according to Markit analyst Paul Davies:
“Most people might assume that central bankers would be watching libor rates, or spreads between libors and overnight interest rates as the main indicator as to the health of the system – they are not. These guys have recently become big devotees to the movements of the CDS markets.”
In other words, credit default swaps – not the interest that banks charge each other for inter-bank loans or other indicators – are the most important indicator that the world’s central banks are now watching.