This article about the role credit default swaps is supposedly playing in exacerbating the Greek debt crisis called to mind a number of Bloomberg pieces on how the same phenomenon was at work in the corporate debt market prior to the credit crisis.

The thing is, neither the Times story nor the Bloomberg ones contained any hard evidence that speculation in such swaps was raising borrowing costs. Yes, spreads on the derivatives themselves widened in both cases, but there was no sign in either, at least in the reports themselves, that spreads on the bonds themselves were also widening.

And even if spreads on both the contracts and the debt to which they refer were both widening, correlation isn't necessarily causation.

What's more, the fact that banks and other investors are speculating in sovereign debt should hardly come as a surprise. As we reported back in August, more swaps have been written against countries like Italy and Turkey than any other single debtor, corporate or sovereign.

In any case, there's no doubt speculation in swaps fueled the U.S. financial crisis by helping put Lehman Brothers and AIG into death spirals, as counterparties required more and more collateral and the demands themselves made it more and more difficult to raise.

 And as we've also explained, the best way to prevent such systemic risk is to limit the use of such swaps to hedging purposes. To do that, their use should be limited to investors who own the debt itself.

Curbing such "naked" swaps in this fashion is easy enough, at least in the U.S. All it takes is lifting the federal ban on subjecting swaps to state gaming laws. By refusing to recognize such swaps as contracts enforceable in court, thereby eliminating the parties' rights to go after their counterparties' assets, those laws long incentivized the parties to put up enough collateral upfront to make good on them.

Alas, proposals to curb the use of naked swaps were part of the early proposals for derivatives reform in the House but fell by the wayside as the bank lobby did its usual thing.