Writing in the London Review of Books, Donald MacKenzie describes a form of gambling masquerading as a sophisticated financial transaction that he describes as the “End of the World trade”, in which an insurer bets that “around a third of the leading investment-grade corporations in Europe or half those in North America” won’t go bankrupt, while the insured bets that they will. MacKenzie says that the cost of the insurance has increased by an order of magnitude during the past year, going from between two and three thousand dollars annually per ten million dollar unit to more than twenty thousand, when you can get it.

I asked one investment banker what might cause half of North America’s top corporations to default. No ordinary economic recession or natural disaster short of an asteroid strike could do it: no hurricane, for example, and not even ‘the big one’, a catastrophic earthquake devastating California. All he could think of was ‘a revolutionary Marxist government in Washington’. That’s not a likely scenario, yet the cost of insuring against it had shot up ten-fold.

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Of course, the credit crisis has increased the risk of systemic economic failure. But the existence and rising price of the end-of-the-world trade indicate something beyond that. The crisis isn’t just about the bursting of the US housing bubble and dodgy sub-prime lending. Nor is it merely a reflection of the perennial cycle in which greed trumps fear to create a euphoric disregard of risk, only for fear to reassert itself as the risk becomes too great. What is revealed by the end-of-the-world trade is that the current crisis concerns the collapse of public fact.

Public facts are those things upon which there is universal agreement. In this context, it’s the value of whatever products that participants in the financial industries are selling one another: “Believable market prices, valuations, credit ratings and balance sheets encourage lending, active trading, competition and keen pricing. If credibility is lost, then everyone becomes wary of lending, deals aren’t done, and an increased proportion of sellers are the desperate, who have to accept fire-sale prices.” Which is to say that when one bank or brokerage is sitting on a pile of highly combustible crap, they reasonably enough begin to suspect that everyone else is, too, so they can’t sell their own crap and they won’t lend money to anyone they suspect is using similar crap as collateral because that would be, you know, stoopid, although it’s a little late now.

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