David Brooks opines on the new "progressive corporatist" class that is likely to emerge in the aftermath of the proposed Paulson bailout. For those that doubt the libertarian class critique of the State or the likes of Roderick Long's excellent deconstruction of FDR New Deal Corporatism, the current bailout frenzy empirically ends any prolongation of such doubt . We are now seeing it in real-time, naked and obvious.

Brooks alludes to credit derivatives(credit default swaps are actually a 70 trillion dollar market, not 40 trillion), pointing out the orders of magnitude explosion in this market that barely existed at the turn of the Millennium. The dirty little secret of Paulson's Wall Street bailout plan directly relates to credit derivatives.

In general, derivatives are instruments that trade on movements/changes in an underlying security or variable. In terms of credit derivatives, the underlying variable is firm credit worthiness. That is to say, the market for credit swaps more or less consists of hedging and speculating on changes in a given Firm's credit standing. And you have 70 trillion dollars worth of bets outstanding on the aggregate credit worthiness of Wall Street as whole; however, the house of cards here is that this 70 trillion dollar credit swap market has no enforcement mechanism against counterparty risk in the event of systemic default. That is to say, in a systemic event, all the losing parties essentially would welch. And the 70 trillion dollar market goes puff the magic dragon, up in smoke, as if it were merely a fantasy game of monopoly.

The weakness of Derivative Instrument Risk Modeling is "low probability" catastrophic, stochastic shocks to the underlying security or variable. Refer to Long Term Capital Management as a case study. In the case of credit swaps, the stochastic shock was the systemic collapse in real estate prices. This was the trigger that threatened the credit rating of Investment banks who were selling short term paper to finance higher-yielding CDOs to profit from the yield spreads. On the seller side, Commercial banks like Citi were saddled with "liquidity puts" or buy-back agreements from these bundled CDO securities that weren't going to perform in a climate of collapsing real estate prices.

What is clear is that the credit swap markets need monopoly enforcement to remain viable; hence the need for bailouts to stem a systemic run on counterparty welching. The clarion call for a new regulatory corporatist class, headed by Wall Street elites, to manage the credit derivatives market in order to "save capitalism." Brooks defines this new expanded elitist political class as post-liberal and post-conservative. The masses are told they have to consent to this new elite political class or otherwise suffer the consequences of not being able to get car loans.

The Paulson plan to bail out the credit derivative market is Exhibit A, incontrovertible proof why libertarianism and the State cannot coexist. Frankly, credit swaps are a dramatic, textbook example of using the power of the State to enforce winners and losers in a failed spontaneous order, in this case, appropriating the power of the state to prop up a 70 Trillion(notational value) risk market that obviously failed to hedge against credit risk.