Monday, November 10, 2008

Eight Bubbles

The news media and a few self-serving corporate executives continue to describe the current financial crisis as a result of a collapse in real estate values or, even more narrowly, a collapse of subprime U.S. mortgages. I have been saying for some time, though, that the problem is much larger than that, and may more accurately be described as a credit bubble, with credit card debt and business operating loans soon to be a greater problem, in money terms, than mortgages.

Saying “credit bubble” is a bit simplistic, though. For those who want to read a technical view of it, D.K. Matal has made a list of eight bubbles that are at risk, along with an attempt to quantify them. No one really knows how large these financial pools are, because so much is secret, and because not everything that could be outstanding is actually outstanding when you put all the pieces together. Still, a cursory look at the list will tell you that the $15 trillion in losses that are projected from mortgages going bad is the tip of the iceberg, if the world financial system really starts to come apart. And Matal did not even mention the problem of insurance, another bubble that could easily fall to pieces if two or three things go wrong at once.

The main thing to understand is that all the financial arrangements out there are worth many times more than all the money in the world. The world has been relying too much on financial arrangements in general, and as we try to bring that house of cards down gently, it should be no surprise if the turbulence makes some of us feel seasick at times.