It Is a Dubai World After All

The thing that makes the swine flu so insidious, I am told, is that the relapse, should it come to that, is particularly dreadful. And so it is with financial contagion. If worse comes to worst and the Dubai crisis turns into "Lehman II: It Came From the Gulf," the risk fallout may well be much more severe than the credit-market seizure that occurred in September 2008.

That's because governments around the world are running low on capital to fund bailouts, and the political will to fund continued bailouts is questionable at best. Right or wrong, the electorate in the U.S. believes that Wall Street got the best of the government and the public during the post-Lehman bailouts, and it is in no mood to put itself in that position for a second time.

For the moment, the crisis—Dubai's sovereign wealth fund, Dubai World, said last week it can't make timely payments on its $59 billion in debt—is ebbing. That's because the United Arab Emirates, of which Dubai is a member, has said it will stand by Dubai's obligations. (Dubai itself, however, has said it has not guaranteed Dubai World debt.)

As a practical matter, there is little immediate danger to consumers or businesses in the U.S. That is because the Dubai crisis is stirring anxiety among investors, who are pulling capital out of emerging markets such as Greece and putting it into the relative safe haven of the U.S., where the long-running and improbable rally in Treasury debt has been extended more times than The Lion King. Even if Dubai World defaults and its lenders take a hit, the vulnerable banks include HSBC, which isn't exactly the only bank on Main Street, USA. If HSBC runs into trouble, the world is still awash with cash, and someone else will step in and make loans to businesses in the U.S.

For a while, at least.

If the public's capacity and will to step in and fund bailout after bailout begins to wane, investor confidence is going to plummet, and the markets are going to be back where they were in late 2008. Flu shots, anyone?