Friday, October 03, 2008

Yet Another Analogy to the Financial Crisis

Some Chinese dairy producers adulterated their milk with melamine, a chemical used in the manufacture of plastics and fertilizer. When infants got sick and a few died, the malfeasance was uncovered. But the contamination was not limited to infant formula, and Chinese babies weren’t the only ones at risk. Any product that contains Chinese milk, such as White Rabbit candy shipped to the U.S., has been recalled.

We don’t know what other food products from China are unsafe, and consumers are playing it safe by switching to milk substitutes such as soy, or drinking juice instead. Fear and the lack of trust has frozen one tiny sector of the world food market.

Just imagine if the problem had been corn and all the products---flour, beef, sweeteners, and biofuel to name but a few—that corn goes into. In the back of everyone’s mind would be the question, can I trust this product? Will it kill me?

The problem with subprime mortgages has spread far beyond those who owned them. If you have a large receivable from an institution that invested in these instruments, you might not get paid, putting your own financial health at risk. Or if you owed money to that institution and were counting on it to roll over your debt, it might demand payment instead. Unfreezing the credit markets is fundamentally a matter of trust. It will take a long time to be restored. © 2008 Stephen Yuen

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