Ouch! This is going to hurt
Ken Rogoff, former head of the IMF, warns that the credit crunch is going to get worse. He suggests that some large financial institutions may fail in the months ahead.
Many Westminster politicians and pundits I speak to don't yet appear to grasp the scale of what is happening. Even some of the more thoughtful talk in terms of this being a short-lived correction. Yet Rogoff implies this may not be some sort of Russia default blip or Asia flu or dot com wobble.
The financial system is bloated - and as Rogoff makes clear, it will shrink.
Put that another way; too much money has been too cheap for too long. As a result, Western governments and individuals borrowed too much. We can no more prevent the consequences that will now unfold than we can suspend the laws of gravity.
This won't stop some politicians from trying.
The real danger is that Homer Simpson politicians confuse cause and effect - and make things worse. For example, in nationalising Fannie Mae and Freddie Mac, the US government will end up solving nothing. They will, however, ensure that solving nothing costs $ billions the US government can no longer afford. As an example of what not to do, it takes some beating.
But by the time that officialdom realises that, there are likely to be plenty of other examples of d'oh-brained government interventions to choose from.
Posted on 20 August 2008 by Douglas Carswell