A bank runs out of credit, we all get crunched

First things first: for all the scary headlines, the collapse of a huge bank in New York does not mean the end of the world as we know it in Nottingham. Life goes on.
But it may have an effect on that life in the coming months.
Most likely, that effect could be that borrowing large sums of money will be very difficult if you have any kind of blot on your credit record.
The same is true for business: going to the bank and asking for money to fund a new piece of machinery could be a tougher conversation.
It will also mean that banks may be more likely to pull the plug earlier on businesses that are in difficulty.
The implication behind all that is faltering growth more job losses.
Put those factors together and you have a recession which the CBI today said would last for six months possibly lasting longer.
There are three relatively optimistic notes in all this. Firstly, property prices will continue to come down to a level that bears some relationship with reality. There are still some people in the property market hanging on for premiums which no longer make economic sense.
Secondly, today's economic shock surely brings forward the point at which the Bank of England decides to lower interest rates.
Thirdly, today’s car crash on Wall Street might – and I emphasise might – mark the bottom of the credit crunch in the sense that we are now entering the period when the world financial system finally starts to sort itself out.
The world of investment banking is a million miles from the life that most of us lead, and before today few people will have heard of Lehman Brothers. So how come fat cats in New York are hogging the headlines here?
It may be distant, but investment banking’s complex tentacles (and complexity is part of the problem) are present everywhere, even though you may not be able to see them.
Investment banks – which, in the simplest of terms, buy and sell financial deals in the hope of making a profit – were behind the house price boom. They bought and sold mortgage debt, helping to create the enormous property bubble that exploded last August and gave birth to the credit crunch.
There is a bitter irony in the credit crunch that investment banking helped create bringing about the downfall of one of its giants.
Bitter, because ordinary High Street banks – and even some building societies – had also taken advantage of the market that the likes of Lehman had fostered. Therefore, they are left exposed. Watch banking share prices to see who the market is concerned about.
Bitter, too, because ordinary people will pay a price of sorts as those exposed banks draw in their horns.
How did this all happen?
One of the major causes of the credit crunch was the business model investment banking was based on: huge bonuses for traders if they tied up a major deal, little in the way of comeback if a deal flopped. Either way, the money they were betting with belonged to someone else.
This flew in the face of the well-established principle that high reward would be tempered by high risk.
It’s the reason why investment banks are full of millionaire traders who will still have their millions, bank shareholders who have been left holding worthless stock, and borrowers and investors potentially facing ruin.
This may be why the US authorities have finally decided that Wall Street has to take responsibility for its actions.
Investment banking is not bad by definition. The willingness to lend on a large scale and to construct all sorts of innovative credit mechanisms has underpinned much of the economic growth the world has seen during the past 15-20 years.
But the rules governing banking have been found wanting. Major failures are a sign of major problems, and major problems that go on to affect the wider economy are a sign of major issues with the ground rules that are meant to protect it.
Whatever you do, don’t cry any tears for the investment bankers. They made a profit. Now they’ve made a loss.
This time, the authorities have decided that the banking system should finally pay a high price for the high risks it took.