Events are moving so rapidly that putting pen to paper is dangerous. Any conclusions can swiftly be swept away by the latest twists and turns in the global crisis. Some observations however:
The seeds of this disaster were sown many years ago and were obvious to anyone who cared to look. The problem is that there were too many vested interests sharing in the ‘good’ times. Crying wolf is a lonely sport. Collective and monumental stupidity is fine provided everyone joins the game. It is a little late to play the blame game now.
The finger wagging and hypocritical politicians leave us gasping. Did they not bask in the warm glow of public approval occasioned by rising house prices and the general perception of prosperity? How many onthe- record comments can we find suggesting that lending practices were incautious or leverage excessive?
And Central Banks? With few exceptions were they not always ready to use the interest rate lever to cushion any slump in markets?
Leverage, leverage and more leverage. That’s what this has all been about. The unwinding process was never going to be pretty but even we are surprised by how ugly it has become. It has a long way to go.
The now infamous Paulson $700bn bail-out had as its main text the unclogging of bank arteries to allow lending to resume. There is no certainty this will work as the issue now is as much about solvency as liquidity. Its sub-text, however, was to convince the American public that lining up at the bank window to withdraw their life savings was unnecessary. This probably will work and is the most important reason why the plan, flawed as it is, should be supported.