Economy

What’s Going On?

Have a read of this morning’s leader in The Times:

The Western financial system is entering uncharted territory. The Great Depression of the 1930s might have been avoided by easier monetary policy. The stock market crash of 1987 did not lead to recession precisely because central banks recalled that precedent and slashed interest rates. But the credit crisis of 2007-08 is a more intractable problem.

While the Federal Reserve has been active in the past year in cutting interest rates and providing support to markets by various initiatives, these steps cannot on their own remedy the fundamental weakness that the credit crunch reveals. This is that large parts of the financial system are technically insolvent after suffering huge losses in the US housing market. Banks treated housing as collateral for loans on the assumption of ever-rising prices. And of course house prices could not forever outstrip the capacity of wage and salary earners to pay those prices.

Good luck, everybody. And hold on tight.

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