More Room to Fall

Over the weekend, ACA reached a standstill agreement with creditors and counterparties who agreed to give it 30 days to raise additional capital or unwind its $60 billion in credit default swaps.

Also facing possible ratings downgrades -- and with that, the increased possibility of default-- are ACA's largest rivals, MBIA and Ambac. Together, those firms insure more than $2 trillion in loans, bonds and other securities. Because the credit-default-swaps market is almost completely unregulated, it's anyone's guess who is at the other end of those swaps.

Although most of the focus has been on the unwinding of the credit bubble here in the United States, there are problems with bubbles in other parts of the world. Those, too, played a role in yesterday's stock market rout.

In India, for example, demand for shares has been so frenzied that last week's initial public offering by Reliance Power had 10 investors clamoring for each share that was offered. Not surprisingly, Reliance was one of the biggest losers in yesterday's rout as selling shaved 7.4 percent from the Bombay Stock Exchange's benchmark index of 30 companies.

In China, where demand for shares is so brisk that the Shanghai stock index has more than doubled in each of the past two years, officials recently concluded that one way to cool things down was to increase the supply of shares being traded. It may have been no coincidence, then, that yesterday's 5.14 percent plunge came on the same day that three major share offerings were announced, including $20 billion by Pinan, the insurer.

Stock markets in Russia and Brazil too were hit hard yesterday, each falling by about 7 percent.

This kind of contagion is rarely a one-off event. Indeed, in Europe and Japan, yesterday's rout was merely an acceleration of a sell-off that began months ago. It's unlikely that the bottom has been reached.

As Bill Conway, a founder of the Carlyle Group and the investment guru of the private-equity firm, told The Post's Thomas Heath last week: "We are nearer the beginning than we are the end . . . The economy is going to be relatively weaker, at least for another year, than it has been the last five years. There are very significant problems ahead."

Steven Pearlstein can be reached atpearlsteins@washpost.com.