Reading the business pages these days is heady stuff, and in particular today, which the BBC’s Robert Peston labels the worst of all days. His list of banks and insurance businesses collapsing into financial trouble of the last few days alone is alarming. So how did we get into this mess? What started with a housing sub prime debt crisis is morphing into an international financial crisis. Our title The Credit Crunch: how safe is your money? by Simon Nixon offers some explanation of how things went wrong and a few answers to the current mess.
The recent bubble, now burst, is well illustrated by the party game, pass the parcel. In the financial markets, the ‘parcel’ layering was fueled by a desire to find increasing numbers of profitable investment vehicles, which in a period of very low interest rates, would satisfy the desire for more and more high yielding investments. This, twinned with the failure by ratings agencies to expose the true risk of some of the better ‘wrapped’ investments – resulted in the repackaging and selling on of layer upon layer of ‘investments’ for which no-one quite knew what the ‘prize’ was – the asset at the heart of the parcel. And it is this parcel of debt that governments and markets are still unwrapping.