Last week, the financial news was full of stories on credit default swaps, which appear to be the next shoe ready to drop in the financial crises millipede that has engulfed the globe since the IKB Deutsche Industriebank of Germany announced on July 30, 2007 that it was marking down the value of some of its financial derivatives based on U.S. sub-prime mortgages. From the comments posted in various blog discussions, of credit default swaps, it is very clear that most people are very, very confused. More troubling, most people are unable – or unwilling – to recognize that the world as they know it now crashing down about their ears.

Very basically, what is happening is that the financial and banking system has found that what it thought was measurable risk is instead unmeasurable uncertainty. And what the system cannot measure, it is unwilling to deal with. This uncertainty has now extended to the financial health of the very banks, hedge funds, and other financial agents themselves. Nobody knows how healthy or unhealthy anybody else is. Therefore, the banks and other agents in the financial and banking system have become unwilling to lend to one another. Goldman Sachs has estimated that these crises have contracted credit in the U.S. by $2 trillion (with a t, not a b). The U.S. economy is now about $15 trillion, as measured by gross domestic product--you can do the math for yourself, to see what a massive impact this is going to have on the real economy.