My Pulitzer pick

Who could have foreseen the Doomsday Scenario now playing out as the federal government tries to rescue Wall Street? That elite, East Coast media, that's who.

Gretchen Morgenson of the New York Times sounded the alarm back in February with a long, detailed piece describing the massive credit default swaps market that is now threatening to swallow Wall Street in a swamp of toxic debt. On Feb. 17 she wrote:

Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

Morgenson went on to report that American International Group (AIG) failed to properly value it's swaps, leading to a $3.6 billion loss. Look how that turned out.

Morgenson won a Pulitzer Prize in 2002 for her coverage of Wall Street. She deserves another.

In what I still think is my best "To The Point," Morgenson came on our show to talk about the effect of the housing crisis on the economy. John Cassidy of the New Yorker was also a guest. He talked about the volatility of the free market and the inevitability of these terrible bubbles when government takes a hands-off approach.

In debt we trust

The New York Times launches a series on debt in America. Gretchen Morgenson, one of the nation's smartest business reporters, is the lead author. If you think the credit crisis/mortgage crisis/mental recession is about Wall Street and deadbeats, you're missing an enormous cultural and social shift taking place in this country.

Here are a few stats from the first story:

Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household’s credit card debt is $8,565, up almost 15 percent from 2000.

College debt has more than doubled since 1995. The average student emerges from college carrying $20,000 in educational debt.

Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Fed, compared with 13 percent in 1980.

Even as this debt was mounting, incomes stagnated for many Americans. As a result, the percentage of disposable income that consumers must set aside to service their debt — a figure that includes monthly credit card payments, car loans, mortgage interest and principal — has risen to 14.5 percent from 11 percent just 15 years ago.

By contrast, the nation’s savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.

The economy and you

Want to know more about the housing crisis everyone's talking about? Then list to my show.

Something else to worry about

Gretchen Morgenson, who did some of the first and best reporting on the subprime mortgage meltdown, opens a window onto a multi-trillion dollar credit insurance market that I'm sure you've never heard of, and warns the market could be the next domino in the ongoing credit crisis.

"The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market," she writes.

The very idea that such a huge chunk of our economy rides on this invisible cushion, this "arcane financial instrument," is simply astonishing.

However, there's nothing to worry about as long as the contracts have been properly managed. Given that the largest customers in the market are JPMorgan Chase, Bank of America and Citigroup - three of the biggest players in subprime lending - I feel no fear.