Today brings mammoth financial news: Lehman Brothers has filed for Chapter 11, and Merrill Lynch is has been taken over by Bank of America. Two giants of Wall Street have fallen on the same day, and there will be more to come.
I love the footage of a puzzled-looking Alan Greenspan talking about a “twice in a century” shock to the system, as if he had nothing to do with all this. The decision to pump America full of cheap debt was one taken by him at the Fed – it’s his bubble that’s bursting here.
Brown copied him in Britain, leveraging up Britain in the same way. Neither saw the bust coming. Greenspan spoke about a one-off adjustment to an era of higher productivity, rather than predicting a trough after the peak. Similarly Brown boasted about abolishing the cycle, “ending boom and bust”. Both used this to justify dangerously low interest rates, which opened the tap of debt. Both left their countries heavily geared up, and exposed to the downturn.
No one is more exposed than the banks, of course, having peddled all this debt they will get hit first. But the next stage is recession, rising unemployment, repossessions and inflation. This is just the end of the beginning.
Comments