Come back- we haven't finished yet
Plenty of headlines today about a global credit crunch. Crisis, meltdown, giant snakes- whatever will become of us?
Clearly these situations can get out of hand. If central banks pull the wrong levers (as the Fed notoriously did during the Wall Street Crash and the Great Depression), things can get very ugly indeed.
But these days central banks understand what to do. As the 1998 LTCM crisis most recently demonstrated, they do know how to turn on the liquidity taps to keep everyone afloat.
We ordinary mortals should actually be much more concerned that they turn on those taps too soon and too much.
Because as we've blogged many times, Britain- and indeed the entire global economic system- is wobbling on a giant bubble of indebtedness. Credit has been incredibly easy for a long time, and debt has ballooned.
And it is simply not sustainable. No matter how sophisticated the financial engineering, sooner or later, someone in the real world has to pay for it. But as highlighted by the US sub-prime mortgages, many of those who've taken on the debt simply can't afford to pay.
Which means that the lenders have to take what's known in the trade as "a haircut". And right now, it looks like that will be more than a light trim.
Some of those high rolling hedge funds are set to go down for sure. Fine- a salutary reminder of risk and return.
Same goes for insurance companies and pension funds- tough on those who've invested with them, but investment always carries risks.
The more problematic area is the banks. Almost all of them have exposure one way or another, and although hard information is scarce, the volume of squawking suggests the pain could be considerable.
The difficulty is that the banks hold our money for us. If they go down, we all go down- even though we'd never imagined we were taking any risks.
We're back to the familiar moral hazard problem- because the public rightly expects their bank deposits wil be safe, the banks have every incentive to chase high yields when lending money knowing that they'll be baled out by the central bank if their loans go bad.
Well, it's not quite as simple as that of course- the banks still lose money on bad loans, and there are meant to be all kinds of regulations and prudential supervision to restrain the whackier lending. But the basic problem remains.
So central banks must not be too ready to bale them out. Having enjoyed all those years of fantastic returns, bank shareholders must be made to take their haircuts. This is not a one-way bet.
In particular, simply turning on the liquidity taps- as the European Central Bank seems to be doing- will end up making us all poorer. Baling out the banks on this scale (£100bn + just in the last couple of days) jeopardises low inflation. Morever, it actually only defers the haircut to another day, when it will need to be even more severe.
Let the Reaper get to the shears.
PS No we're not advocating letting a high street bank go under. But before we taxpayers have to bale them out, we need to see their shareholders lose everything. Simple as.