Beware unexploded and highly toxic debt bombs

Until the banking system finally works out just how much toxic bad debt there is out there parcelled up into all of those complex multi-tiered financial instruments then the credit crunch will never be resolved. Indeed the events of Bloody Sunday and Meltdown Monday will - in the near term - serve only to accentuate the severity of the credit crunch. We have moved swiftly from a world in which the word scarcity barely seemed to exist in financial markets to a position where the supply-lines of credit to business and household customers have become as blocked as the fattest artery.

The British economy has become dangerously dependent on financial services as a key contributor to GDP growth and trade balances. By some estimates nearly thirty per cent of our national income is directly linked to banking, insurance, currency exchange and related wheeling and dealing.

There is no escaping the fall-out from today’s events and there must be a real chance that a major UK mortgage lender such as HBoS goes under - always supposing that the authorities are not prepared to sanction a massive bail out and a further rise in public sector debt. At last, by allowing Lehmann Bros to go under, the authorities have restored the concept of moral hazard. Mervyn King must have enjoyed a quiet moment of satisfaction from this event alone.

Today was one of those teaching days when the syllabus goes out the window and we just took time out in lessons to keep up to speed with the frightening velocity with which these historic events are being played out. I have attached a rough and ready Powerpoint presentation that I used at times during the teaching day.

Meltdown Monday
Meltdown_Monday.ppt