The worst crisis I've seen in 30 years

(TM note: high quality comments at the end.)

The latest financial downturn is the final nail in the coffin of the conservative free-market world-view

Will Hutton
The Observer

I have been following the financial markets for more than 30 years. Crises have come and gone, but the one unfolding since August and which intensified last week is the most serious. It is not just that its impact is cascading around the world because of the new interconnectedness of global finance, it is that the authorities, particularly in Britain and America, have lost control and do not have the means to regain it as quickly as we might hope. With an oil price approaching $100 a barrel, we are in an uncharted and dangerous place.

After more than 15 years of extraordinarily benevolent economic conditions worldwide - cheap oil, cheap money, growing trade, the Asia boom, rising house prices - things are unravelling at bewildering speed. The system might be able to handle one shock; it is undoubtedly too fragile to handle so many simultaneously.

The epicentre is the hegemonic London and New York financial system. No longer are these discrete financial markets; financial deregulation and the global ambitions of American and European banks have made them intertwined. They are one system that operates around the same principles, copying each other's methods, making the same mistakes and exposing themselves to each other's risks. Thus the collapse of the American housing market, the explosive growth of American home repossessions and the discovery that 'structured investment vehicles' (SIVs), the toxic newfangled financial instruments that own as much as $350bn of valueless mortgages, are not American problems. They are ours too.

The recent departure of the CEOs of two of the biggest investment banks - UBS and Merrill Lynch - after unexpected losses and loan write-offs running into many billions of dollars is not just an American problem, it's ours. It is also our problem that Credit Suisse last week announced more billions of write-offs, and Citigroup was rumoured to be following suit with even bigger losses. When banks take hits as big as this, it hurts their capacity to lend, because prudence demands they have up to eight dollars or pounds of their own capital to support every hundred dollars or pounds that they lend. If they don't, they have to lend less - and that is called a credit crunch.

This crunch is already upon us - hence the massive selling of bank shares at the end of last week and the extraordinary news that the taxpayer, one way or another, now has supplied £40bn to the stricken mortgage lender Northern Rock, a sum that could climb to £50bn by Christmas. Stunningly, that represents 5 per cent of GDP. The bank got into trouble because it thought, under the chairmanship of free-market fundamentalist Viscount Ridley, that it could escape trivial matters like having savers' deposits to finance its adventurous lending. Instead, it could copy the Americans and sell SIVs to banks in London - most of them the same banks that bought from New York - and it could steal a march on its competitors.

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