More on Risk in US Economy from S&P

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S&P's reduction in its outlook for the US economy received a lot of attention. In particular, there has been a lot of discussion about the ability of our fractured political system to deal with projected increases in the national debt. Another aspect of the S&P report is now receiving attention. They have a real concern about our ability to deal with the next financial crisis. They estimate that it could cost around $5 trillion when it hits and that the US economy has been weakened by its response to the last crisis and less able to afford another bailout. They are primarily concerned about systemic risk due to the widespread use of credit derivatives and the complex interconnections between the players in this market. It is the most profitable sector in the banking industry and little has been done to reduce systemic risk, perhaps for that very reason. There is also a concern that US banks are still holding assets on their books that may not have been written down to their true market value. This makes them vulnerable to a slow economic recovery. Spain has been cited as an economy with a damaged banking system holding bad loans. Some have compared the US banking system's risk profile with that of Spain. Its pretty clear that we are not out of woods yet and that there is more uncertainty in our financial system than many believed.