Via Steve Clemons, this excerpt from a speech by Leo Hindery – an Obama economic adviser and Chair of the New America Foundation’s Smart Globalisation Initiative – which is due to be delivered later today at a conference organised by NAF:
As we all know, the Bush administration is asking Congress to let the government buy $700 billion in troubled mortgages, which would raise the statutory limit on the national debt to $11.3 trillion from $10.6 trillion. This $700 billion is over and above the $85 billion already committed to AIG, the $29 billion related to Bear Stearns, and the very conservative $25 billion associated with the bailouts of Fannie Mae and Freddie Mac.
The solutions being proposed are the most expensive combined bailout in the nation’s history and will sharply curtail the ability of the next president to push for tax cuts or new spending. And yet I believe they are not nearly enough, since they do not adequately cover the exposure associated with leveraged loans and, especially, the credit-default swaps market which has ballooned to a nearly unimaginable $45.5 trillion, from $900 billion in 2001.
This credit-default swaps market, which was developed by financiers who hired the best lobbyists they could to keep regulators away, is essentially nothing more than insurance on debt, but because there are now many more credit-default swaps outstanding than there are bonds for them to cover, it could potentially be a black hole of distress at least as large as the sub-prime mortgage crisis. Tens of trillions of dollars ago these swaps became nothing more than a way to gamble with almost no money down.
Alan Blinder suggested over the weekend that “the root cause of all of [our credit problems] is declining house prices”, and he is correct – but his observation ignores the fact that to this particular root ball were grafted a lot of other financial instruments which have together grown into one heck of a tree.
Senators Kent Conrad, Byron Dorgan and Richard Shelby of Alabama, and others, were more right than wrong when they said last week that more than likely “we’re talking about a trillion dollars.”
