The false light
Yesterday the Dow Jones Industrial Average rose nearly 1,000 points. It was, in fact, the largest single day point gain ever. (As I write this, the Dow is up nearly 100 points. ) Yet, I wonder if this sudden optimism is the result of reports about the new Euro-American strategy to end the current crisis, or if people are just flat out kidding themselves.
Right now there is a demon lurking about, and most assuredly waiting for us in 2009. This demon is the inevitable fallout from the unregulated shadow market of credit default swaps. Unchecked, this demon could cause serious damage to our economy. So, how do we check it? Here’s Steven Pearlstein from The Washington Post:
The top priority ought to be on setting up a new clearinghouse for those credit-default swaps that everyone’s heard about but few understand. The swaps are essentially insurance policies — in this case, insuring against the possibility that a particular loan or bond or tranche of an asset-backed security will default. But unlike real insurance companies, the hedge funds and investment banks that wrote these policies were largely unregulated and were not required to set aside any reserves in case they were required to pay up. The big fear now is that when those defaults start to roll in, as they almost surely will, the “insurer” will be broke.
Moving on, while Obama and McCain are busy making unrealistic promises to voters around the nation, we are faced with the specter of massive deficits. Quoth David Brooks on Obama’s spending plan:
When you add it all up, we’re not talking about a deficit that is 5 percent of G.D.P., but something much, much, much larger.
Brooks also says that Obama’s “tax plans aren’t as irresponsible as John McCain’s, but the Tax Policy Center still says they would reduce revenues by $2.8 trillion over the next decade.”
So, it seems as if both candidates (assuming they follow through with their plans) will reduce revenue, by spending less while spending more.
The real crime in all of this is that the candidates are completely ignoring the hurricane heading for Washington in 2009. Sure, its possible that Bush administration may work successfully with our European allies to avert a major catastrophe, but I’m skeptical. I’m skeptical because everything Bush attempts appears to have the opposite result of what was intended, and because I don’t believe that the Europeans alone (and the Brits in particular) can revive the credit market.
