Feb 26 2007
Debt Market Insurance Sows Seed of Own Demise
“File this under strange but true: Insurance encourages risk-taking behavior, and ultimately, it increases the size of a disaster when it finally strikes. That is bad news, really bad news, for the debt markets. So bad, in fact, that if you’re worried about a financial-market meltdown, you should be watching the debt markets and not the stock market.”
Those words could have been ours, but they are those of Jim Jubak over at MSN Money, in an article bluntly titled “Debt-market bomb could hurt us all.” If your among the Goldilocks crowd who believes the economy is immune from anything problematic thanks to all the smart folks on Wall Street and at The Fed, perhaps you ought to give Jim’s article a read. It is an excellent short primer on the risk credit derivatives play in the market, and ties them into the emerging problems in the sub-prime mortgage market. Recall, derivatives are what Warren Buffet referred to as financial weapons of mass destruction a few years back.
On the other hand, you can go on trusting the wisdom of those who are now saying this problem is totally self contained, and that the housing bubble is already at bottom and ready to kick in the next upward leg. Of course, those were the same people who denied the housing bubble existed in the first place, and then denied it would cause any problems in the new era of highly robust debt markets.
Go ahead and pick your horse.
Stay Vigilant!
