DUBAI AND U.S.

Fresh off a day of binge eating and holiday frivolity, America is waking up to the stark reality of the financial crisis that just won’t go away, and an administration that seems is in total disconnect between its ideology and economic realities.

Dubai World, the city-state owned corporation of Dubai, announced that it was seeking a 6 month extension to repay its bonds. Translated: it defaulted. It owes approximately $80 billion. Okay… what does that have to do with us…and U.S.? Well, if you are reading this, most of you have seen the pictures of those gorgeous buildings built in the middle of the desert on the Arabian Peninsula. If you are golfer, you have seen Tiger Woods play golf tournaments on Dubai’s green oasis golf courses. If you are a musician, you know that this is where Michael Jackson went to recover from his child molestation charges. That’s Dubai.

The Dubai government, with no oil of its own, attempted to build an Arab financial center on its little piece of heaven. Seriously, it was admirable effort to develop a pro-western financial center in one of the hot bed areas of the world. Although it enforced strict Muslim rules for its residents, guests were isolated in very pro-western luxury. It, indeed, is a beautiful city.

But it was built on borrowed money based on the overall influx of petrodollars into the region. The near financial collapse of the West in 2008 extended to Dubai as world credit markets froze, and have only partially and stingily thawed. The good times stopped rolling here, and they stopped in Dubai. One newspaper reported several months ago that the Dubai airport had thousands of abandoned Mercedes. Folks just drove the airport and flew off.

Although it sounds like a lot of money, the Dubai default is relatively small, but it has major implications. First, nobody knows who holds the bonds. Second, credit default swaps (bond insurance) exist Dubai bonds, and nobody knows who issued them. So far, it appears that European banks and financial institutions will bear the brunt of the losses. Asian banks also appear to have substantial exposure, although they have initially denied it. I wouldn’t be surprised to see Citigroup and AIG, the two largest American bailed out financial institutions, have exposure. It just keeps getting better.

The biggest risk to the fragile world markets is the fear of another credit freeze. The recovery since September, 2008, has been tenuous at best. The Obama administration, rather than concentrating on economic recovery, decided to push an ideologically based health care initiative and cap and trade garbage legislation. Not a good thing when the United States is awash in debt, with that debt growing geometrically each day.

In the meantime, Obama is out playing golf on a regular basis. He hosted a gala state dinner with Michelle dressed in a gold gown that was gorgeous, but a tad out of touch when people are banging on food bank doors in record numbers.

I doubt if the Dubai crisis will have long lasting effects other than a short term, but painful, blip on the radar screen. But the fact the blip is there at all should be a wake-up call to the Obama administration. Mr. Obama, please concentrate on getting our fiscal house in order. Leave your left wing politics for another day.