A summary of what we have discovered so far

1) The primary cause of this crisis has been the recycling into international markets of the huge quantities of credit built up by the major exporting nations far in excess of what could sensibly be used in productive investments. In other words, trade imbalances are the source of our misery. subprime mortgages, credit derivatives, excessive credit card debts, insufficient regulation, greed and fraud are just the channels through which the consequences of these unsustainable imbalances flowed.

2) However painful, the world will have to develop some sort of international framework that imposes balance in international trade, either by a return of that “barbaric relic” the gold standard or by something like the International Credit Union proposed by Keynes at Bretton Woods. Until we do this nothing can protect us from the impoverishing results of chaos.

3) The bank run in the early 30s probably did as much to deepen the great depression as anything else and “the strength of a banking system is that of its weakest bank”. So, allowing one or more large banks to fail in anything like the disorderly way that Lehmans did last year could precipitate widespread chaos and is worth taking a lot of trouble to avoid. In general, the shoring up of the banks by governments and central bankers is the correct action.

4) The assets of our banks are, in general, still generating an income stream. The reason that some of them are considered toxic is the belief that this income stream will diminish or come to an end prematurely because of the continuing deterioration in the value of the collateral on which these assets are based and the likelihood of debtor default. We won’t know how toxic these bank assets really are until property prices find a floor.

5) Proposed government-backed bank insurance schemes make sense because only public institutions are in a position to slow the fall in property prices and therefore underwrite the value of the banks’ loan books.

6) The case for inflating away the debt built up in the banking system, by consumers and now by the government is so overwhelming as to be almost unaswerable and the monetary authorities have the means to do so. The deflation of the last few months will turn to inflation before very long.