February 23, 2009

The crisis is still far from over, and just when we think we understand it, another surprise pops up.Nevertheless, there is broad agreement on at least some of the causes, and the responses to these will help define the future shape of the financial world.The crisis has wrong-footed observers repeatedly. This should make us wary of firm predictions of the new financial world. This sense of humility is reinforced by the realisation that the full extent of the damage caused by the crisis has not yet been realised.

Thus the current tally of losses incurred by banks worldwide is around US 700bn, but the final bill could be a mutiple. As a result, the rules of the game may change several times before the picture becomes clear.The law of unintended consequences has been at work in spectacular fashion in this crisis.Just one example should suffice: the previous celebration of the efficiency gains from the risk-spreading arising from the global distribution of structured credit instruments has given way to an awful realisation that the risks were concealed.