What do American collateralized debt obligations have in common with Chinese dairy products?
For starters, both can be highly toxic. Collateralized debt obligations based on subprime mortgages have brought America’s economy to its knees. In China, dairy tainted with melamine was used to make infant formula that is now blamed for sickening 53,000 infants and killing at least four.
In addition, both can wind up in unexpected places, and do serious harm to consumers. Some of those exotic debt instruments wound up in very conservative, “ultra-short” US bond mutual funds, sparking declines, and on the balance sheets of far-off European and Asian financial institutions–threatening the same kinds of illnesses they caused in the United States, where they have decimated Wall Street.
The Chinese dairy products that sickened so many infants have turned up in Pizza Hut cheese in Taiwan, cookies in Macao, White Rabbit Creamy Candy and Cadbury chocolate all around Asia–even in instant coffee and tea in the United States.
The hopeful news in all this is that in the process of creating so much toxicity both the distressed loans and the distressed food are teaching us important lessons about the limits of scale and regulation that support the massive globalization of the last decade. We are learning that regulators have lost the ability, if they ever had it, to truly monitor the extent of the danger. In both the financial and food arenas, no one–including regulators–has been able to give us a good read on the extent of the problem.
Treasury Secretary Henry Paulson came up with the idea of a $700 billion bailout program for financial institutions holding toxic debt not because he knows that the problem is $700 billion in size but because he can only estimate the scale of the problem as being between $500 million and $1 trillion. The actual amount could be much higher or lower, and will presumably become clearer once the institutions begin selling their bad loans to the US government.
Similarly, no one seems to know the extent of contamination from the tainted Chinese milk that infiltrated so many products sent off to so many places around the world. The US Food and Drug Administration reported last week that California distributors had recalled White Rabbit Candy and Mr. Brown coffee mixes being sold in the United States because of suspected contamination with melamine, a synthetic protein used in manufacturing, that was added to the milk.