Looking back over seven momentous days

It was perhaps the most remarkable seven days that any of us who have been teaching Economics for a generation or more have experienced. The financial markets risked meltdown, iconic investment banks went to the wall, indeed investment banks have more or less disappeared from Wall Street. The UK government refused to allow a major high street bank to collapse and was prepared to relax competition policy rules to nudge Lloyds-TSB into bed with HBoS. The FSA stepped in to ban short selling (Aaron Haselhurst is on great form here explaining what short selling is!) And we ended the week with an ultra-ambitious plan to nationalise the bad debts of the UK banking system in a move likely to cost the US taxpayer hundreds of billions of dollars.

We shouldn’t for a moment think that the worst is over. My fear is that the UK economy and the UK government remains vulnerable to a fresh wave of negative speculation as the markets test the British government’s resolve to protect our leading financial institutions.

To use a phrase once coined by a Labour Party spin doctor, last week was a good week to bury bad news.

One of the stories that fell under the radar for most people was the scarcely credible increase in UK government borrowing of more than £10bn during the month of August. The five-month public sector debt level is running way above the March 2008 budget projection, and is already more than £40bn - we are now looking at a rise in government borrowing of up to 70% more than last year and the accumulation of government debt is a very worrying development for those of us who believe in the mantra that today’s borrowing is tomorrow’s taxes. In a week when consumer price inflation in the UK surged to 4.7% the macroeconomic climate facing the British economy worsens by the day. 2009 will prove a very difficult year for the economy.

A selection of articles from the press today on the crisis

Stephen King in the Independent: ‘Capitalism can be incredibly unstable and state intervention is back, big time’

Larry Elliot in the Guardian: This week’s financial crisis marks the end of an epoch

Ken Rogoff in the Times on some of the implications of the US bail out of the financial system

Financial Times editorial on the bail out

Roger Bootle in the Telegraph on the limits to free markets

Robert Peston’s unmissable blog including this post on the emergence of a new world order.