The Second Great Crash

The ominous title above has been used all too many times since the First Great Crash of 1929. Book after book, article after article sounded the alarm. But Crash No.2 never came - until now, perhaps.

In fact, the world economy has suffered many hard, but temporary knocks since the end of the Second World War. In every case, severe economic pain was visited on the nation states, but the agonies were transient.

In the current crisis, the collapse of further major Wall Street and British firms, after promising lulls in the flow of bad news, has caught the politicians and the regulators by surprise every time. Because they failed to understand what was happening before the sub-prime woke everybody with its nightmares, these high and mighty people had no plans for coping with the awful results of profligacy, and so they had to improvise.

Yet financial crisis stemming from Wall Street was utterly predictable. The pattern is always the same. I can say this with feeling, because I once wrote a book with my friend Norris Willatt, under the rousing title, Can You Trust Your Bank? Our answer was No, but don't worry too much, because your government will always feel obliged to bail out the few villains to save the many suckers - and along with the latter, the national and world economies.

The catch is that the regulators and politicians are no more likely to anticipate events than the suckers. Forced to act by ignored but now all too evident crisis, the governing bodies under-react for the same reason that allowed the crisis to emerge in the first place; they don't really know what's going on - how the system broke down, who was responsible, and what is going to happen unless intervention paves the way for salvation.

This tale has been repeated again and again since the turn of the Millennium. The 'New Economy' played the same old game by persuading the suckers that all and any high-tech entrants were gold mines; the dot.com debacle duly followed as bad businesses, badly run, collapsed in droves. Then, in 2004 Alan Greenspan, fabled head of the Federal Reserve, 'opposed tougher regulation of the financial derivatives' and for good measure praised the sale of 'adjustable-rate mortgages and refinancing for ordinary homeowners'. He can thus claim the dishonour of being the Father of the Sub-primes, which brought the US to near-ruin in a couple of crazy years.

The lessons are starkly plain and can be summed up in three words: TAKE GREAT CARE. Why didn't the big beasts of finance heed that warning? One reason is simple hubris. They thought they were marvellous and so did others. They knew they were marvellous because they made such incredible money.

Top managers made bad, ill-informed decisions with insufficient care because their own reward, not the wellbeing of the businesses, was foremost in their thinking.