Forget sub-prime mess, write about credit default swaps

Attorney Henry Banta writes on the Nieman Watchdog site Friday that business journalists are spending too much time focusing on the sub-prime lending crisis and ignoring the problems surrounding credit default swaps, which could have a bigger impact on the economy.

Banta writes, “Last year the output of every living soul on the planet was only $65.8 trillion.  This year the CDS market purports to be worth $62.1 trillion. Doesn’t this raise some questions?

“How can it possibly be worth that much?  Remember this is stuff that didn’t even exist ten years ago. Suppose they are not really worth $62 trillion? What then? The whole sub-prime market was only worth $6.5 trillion, and look what happened when it got into trouble. What will happen if a $62 trillion market gets into trouble? Who is at risk if the system unwinds? The issue sails into stunning complexity since the CDS are bought and sold by parties who are likely to be unrelated to the original parties. How does it all get sorted out?

“This system was put together in a rising economy when the chances of any default on corporate debt were small. But if we learned anything from the real estate market, it is that it is insane to assume that whatever goes up will keep going up.

“Aren’t there issues here that deserve some serious public discussion?  Might the media take their eyes off the Phoenix housing market long enough to give the issue some attention? Perhaps ask the presidential and House and Senate candidates a question or two about it?”

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