If Entire Countries Go Broke, We'll Go With Them

Note, too, that the slowdown in securitization -- the slicing and dicing of assets to be sold as securities -- will add to this potential mess. In the past, the much-maligned process funneled huge amounts of capital to the developing world. That's not going to be happening anymore, at least not for a while.

No wonder global markets are so jittery about the prospect of countries defaulting. The rich, developed countries enjoy huge resources that can save them from financial collapse. But those resources are not unlimited. In Europe, taxes as a percentage of GDP have grown to 43 percent (compared to roughly 20 percent for the United States). Translation: If Hungary, Pakistan or South Korea went broke and European governments were forced to raise taxes to finance a bailout, the economic pain would be excruciating.

That is why the "shock and awe" of the current bank bailout efforts hasn't yet stabilized world financial markets. Investors suspect that the problem is just too expensive to confront. The IMF estimates that global banks have already lost $1.4 trillion. By the time the world fully enters into recession next year, global bank losses will almost certainly have increased dramatically. Some experts expect them to reach a whopping $5 trillion.

So the question remains: Do the world's governments have the resources to take on such a massive rescue operation? The global markets aren't sure.

Our next president, beginning the day after the election, needs to call for global contingency plans in case countries collapse -- because the financial market will bet against the global economy as long as this uncertainty exists. Eliminate that uncertainty, or at least show how the world economy will cope with such calamities, and our policymakers can return to the thorny job of cajoling our bankers into lending again. The great uncle is not assuming that the worst is over.

davidmsmick@att.net

David Smick, a global financial strategist, is the author of "The World Is Curved: Hidden Dangers to the Global Economy."