"It is too early to tell how economically important this upheaval will prove. But nobody can doubt its significance for the financial system. Its origins lie with credit expansion and financial innovation in the US itself. It cannot be blamed on "crony capitalism" in peripheral economies, but rather on irresponsibility in the core of the world economy."

What has happened raises important questions...

First, why did this crisis start in the US? The answer is: "The borrowing, stupid"...

Second, what created the conditions for the crisis? It took foolish borrowers, foolish investors and clever intermediaries, who persuaded the former to borrow what they could not afford and the latter to invest in what they did not understand...

Third, why did this crisis escalate? "Contagion" is, as always, the answer...

Fourth, how bad might the impact become? Since Americans borrow in their own currency, the US authorities can, it seems, loosen monetary and fiscal policy at will. Nevertheless, a significant global slowdown is not impossible...

Financial crises are always different in detail and the same in their essence. This one is no exception. It showed the normal pattern of rising prices of assets, expanding credit, speculation, excess, then falling prices, default and finally panic. The new securitised financial markets are meeting a test. We will soon know how far they manage to pass it."

Martin Wolf in the Financial Times

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