More Thoughts on Today

George Magnus, senior economic adviser at UBS Investment Bank in London has been one of the more accurate observers of the ongoing credit crunch.

A couple of highlights from his latest thinking:

...In terms of events, it's not possible to know exactly what happens next, but as you all know there are other major institutions in the financial instability frame, not to mention the maybe 100 or more smaller or non-diversified banks that in all probability could get into bad loan difficulties or fail. The problem at the moment of course, is the speed at which the de-leveraging is unravelling, and the not-knowing how and when a systemic solution will be found. I don't think there's any question about 'if' this will happen, but when and under what circumstances.

Fifth, legislation to provide borrowers and lenders, whether in the financial or housing sectors, with a framework within which to work out loans and payments. The recently passed FHA Housing Stabilisation and Homeowners Retention Act was of course the first major example.

You can see how seriously he takes the credit crunch. Here's how he summarizes his current thinking:

First, a reasonable, orderly work-out of financial deleveraging, if it were ever a possibility, now no longer seems possible

And fourth, the economic consequences cannot be fairly estimated really until financial stability has been restored. At this point, it would seem as though the recession in the US, and in some other countries, may continue into the first half of 2009; and that a new cause for concern is the impact of the policy response to the financial crisis on US debt instruments and the US dollar.