The CDS bomb is (as Warren Buffett said of these financial WMDs) an existential threat to the US and global economy for the following reasons:
Roughly doing the numbers, AIG has caused negative externality costs that have already cost us (the U.S.) $163B (and more will be needed)
If we estimate that AIG's additional government coverage of their negative externality costs may go to $270B (for easy math), then that would equal 10% of AIG's $2.7T of CDS contracts (and many times what AIG ever made in phony privatized profits).
Scaling up (at the AIG 10% rate) to the whole CDS 'debt bomb' mess (or what Buffett aptly calls CDS financial WMD explosion), this would mean that the entire CDS disaster based on an estimated total of $55Trillion CDS contracts would imply a $5.5T negative externality cost imposition on world governments --- or on the world 'public sector' in order to 'bailout' this privatized looting via production of these negative externality cost creating products (CDSs).
Naturally, if the US ponies up about $270B to bailout AIG's 4.9% (call it 5%) of the world CDS contract base, this also suggests a similar scale-up to 20 times this figure (or $5.4T) to bailout all the CDS contracts known to exist in the world (where ever they are hidden).
Two points:
1. As far as making a little short term, privatized faux profit by creating a product with massively higher negative externality costs --- these financial bandits make the cigarette industry look like pikers, for only killing a few tens of millions of people and causing the health care system to go into systemic collapse.
2. It might be a good thing for public, democratic governments to require analysis and regulation of such so-called 'innovative' products that can be reasonably judged to create massive 'negative externality costs' BEFORE they are allowed to go into so-called production!
The later point suggests that America's founding fathers (having seen the destructive force of the royally chartered East India Corporation) may have had a pretty good idea in starting our country with the requirement that any joint financed corporation be carefully chartered to insure that only a limited and well understood "public good" be pursued, or else the charter for that corporation would be killed off ---- before we would be killed off. Great idea, but it may be a bit late today.
CDSs are definitely NOT just like the "big numbers" on insurance policies. They are like big 'debt bombs' just as Buffett said ---- and they pose the potential of a nuclear winter as they continue to explode --- which they will automatically (like the doomsday machine in Dr. Strangelove).
Getting back to the Titanic analogy of this titanic (and probably doomed) destruction of our political economy, the metaphor is shockingly accurate: Wealthy, and more importantly elitist, 'bad actors' of titanic hubris, and with thoughts only of their 'economic EMPIRE' overpowered and exceeded the speed of this ship in dangerous waters with no concern because they thought they were 'masters of the universe' and in total 'god-like' control, when their errors of prudent seamanship hit the first supposedly unpredictable (but entirely predicted, by Yale ‘financial bubble’ expert Robert Shiller) iceberg of declining home prices, the cold reality of deadly sea-water poured into the first supposedly water-tight compartment of individual mortgages, then flowed over the faulty (mis-designed) not-so-water-tight compartment 'A' into compartment 'B' (the CDOs of supposedly 'securitized' debt obligations), and then unstoppably, flowed over it with hardly a delay, into the supposedly 'risk-managed' water-tight compartment 'C' (the CDSs, which were imagined by these 'masters of the universe' to be unbreachable), and then began flooding the engine room of the real economy. Sure the government ran the 'money-pumps' at full speed, but (just as in the real story and movie of Titanic, when the ship's designer lays his engineering drawings on the Captain's table and explains how too many supposedly water-tight compartments have already been flooded, and that more will inevitably be so) soon our ship of state starts to list and turn bow down.
The words "captain, my captain" were never so plaintively called out by the average American citizens on the lower decks, while the First Class, top-deck, elitist, empire-thinkers who caused this disaster are now busy launching their 'lifeboats' full of money (with the aid of UBS) to get away from their own country --- leaving all average Americans, and our country, heading 'under-water' (as that previous 'used car dealer' phrase has become a 'household' word). The rich, the elitists, the Empiristic, the faux royalty, are merely concerned with themselves, and in saving their Louis XVI-like "Blue Diamond of the Crown" --- which they can no longer hide with UBS (helping "you and us" abscond with 'private wealth' as their TV ad implies). And so, with Bernie and Ruth playing the lute (or loot) in their penthouse as New York burns, we "beat on boats against the current", but now ceaselessly borne back unto the bottom.
Extinction --- the final issue:The final issue of Extinction will be determined by how well we fight the ruling-elitist Empire and its economic war, waged with the complex new weapons of Externalities.
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