THE CREDIT CRUNCH

The credit crunch has three clearly defined elements; the circumstances responsible for its occurrence, the event that was the trigger and the policy direction for a solution. This paper identifies these and then runs the tape fast forward to see how it happened. The key lies in the overvaluation of property, namely the instruments securitizing mortgages. This led to the need to write off nearly half the inflated value acquired in the US sub-prime market, cash shortfalls and the collapse of banks. The trigger is the oil price bubble that extracted cash equal to 5% of global GDP. The result was to value property at above its Sustainable Value, which may not only be used as an analytical concept but in practice to take the place of the control mechanisms that have manifestly failed. There is no identifiable fault in the financial system at large. We need to recognize and fix an identified mechanism of financial control and bring about a timely restoration to healthy running.