Sure, it’s fine when someone runs an escort service out of your house, but when other people want to get in on the hot naked action, suddenly it’s just not allowed. Which is why Rep. Barney Frank is trying to get naked credit-default swaps banned.

House Agriculture Committee Chairman Collin Peterson said he is helping draft the legislation, which is part of a broader overhaul of oversight of the $592 trillion derivatives industry. Peterson said Frank indicated that he wants a ban on naked trading.

Naked trading sounds like something that goes on at one of those gross nudist resorts that you think is going to be sexy but is instead filled with people that look like the above, where old naked people sit around and trade stories or worse, each other, because you’re just hanging out in nature, no big deal, just the way you were made and the human body is a beautiful thing with all its lumps and liverspots and hair growing in weird places and things sagging to the ground and for the love of God make sure you carry around a towel to sit on because, ew. But it’s not.

Naked trading, as it concerns this, is just the trading of credit-default swaps when the trader doesn’t actually own any of the insured debt. It’s largely blamed as having a significant part in last year’s LOL-fest, and in particular the neutering of AIG. It’s hard to say exactly how much of it goes on, but of course that’s no reason not to speculate because it might get you name-checked on a finance blog featuring pidgin English and naked hippies.

As much as 80 percent of the credit-default swap market is traded by firms that don’t own the underlying debt, Eric Dinallo, the former superintendent of the New York State Insurance Department, estimated in a January interview.

Congratulations, Eric!

Of course, where one finds talk of regulating something financial, one also finds naysayers in the finance industry terrified they will only be able to make ludicrous amounts of money instead of obscene piles of it and so react the only way they know how: doomsday prophecies.

“It will inevitably lead to higher costs of funding across all U.S. corporations, significantly reduce liquidity in credit markets, and further widen the opacity” of other instruments that rely on credit swaps for pricing, said Tim Backshall, chief strategist at hedge fund adviser Credit Derivatives Research LLC in Walnut Creek, California, in an interview yesterday.

Did you know that? If you make any changes at all to the way things are done, the end result will be a severe slowdown in lending that will lead us directly back into this same mess again so don’t you dare touch this cash cow, Frank. You’ve been warned. One wonders how the world managed to spin on its axis in the billion or so years before 1997 when the CDS was invented. Indeed, 1996 was a very dark time in which it would cost you ten dollars to bum a smoke off a guy at the bus stop.

As it happens, Rep. Maxine Waters’ idea to just ban the things altogether was simply a clever ploy to create a public conversation on the future of derivatives, and was not the unhinged overreaction of a confirmed madwoman.

“We knew an outright ban on CDS was going to be highly controversial,” Waters said. “We thought it was important to target this particular type of derivatives because we think it has caused a lot of harm, and we thought to get a decent discussion going, we had to go after it.”

Nice save, lady.