We are to the point of fearing fear itself. America in all its resplendent free market capitalistic glory is on the auction block with few bidders. How this came to be is obvious in retrospect: too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive me first greed, too little concern for the burden of future generations; a political morass unworthy of our Founding Fathers. You may have more to add to the list, but frankly there isnt enough time. Historians can sit back and reflect, but at this very moment, America is for sale and there is fear and trembling in the auctioneers voice.
Average Americans know little of the ways of Wall Street nor will they ever, I suppose. Every day, these days, is on-the-job training for yours truly, so how could Jane or John Doe ever understand the complexities of overnight repos or reverses, the selling or buying of protection on corporations via Credit Default Swaps (CDS), or the reasons why some investment banks are saved while others are allowed to fail? They cannot. So let me put it simply. Credit markets are based on trust and when there is no trust, markets can freeze up. My Co-CIO Mohamed El-Erian has a great everyday example. Imagine yourself at the drive-thru ordering a Big Mac. At one window you order and pay, at the other – 20 feet ahead – you pick up your lunch. What if you thought that after paying at the first window, your 1000 calorie sandwich might not be waiting for you a few seconds later. You might not pay; business as usual might not take place. That is what is happening in the credit markets. They are frozen in McFear. After the failure of Lehman Brothers – an investment bank which took orders at one window, and promised to pay at another for trillions of dollars of those CDS, swaps, and other derivative sandwiches – institutional investors said that theyd prefer to stay at home and have peanut butter instead of risking their money ordering a Big Mac. And so their money goes into that figurative mattress instead of the register at McDonalds, people are laid off, profits go down, bank loans become less available, our economic center cannot hold.