I’ll try to be brief. The question I’m trying to deal with is this:

There have been many financial crises in the past 40 years. What’s so different about this one?

The problem with economics (the dismal science) is that, in the main, it studies the aggregate behaviour of people in respect of there financial activity. People, in the main, go with the crowd. When we’re in the mood to spend (as a population) it affects most of us. Nearly all of us tend to spend. It’s the economic zeitgeist. When we’re in the mood to be frugal, we save or pay down debt (which is the same thing in economic terms).

The world just went through a psychological shock and now, suddenly, everyone is in the mood to save. If you could suddenly make people switch from spending to saving you could wreck an economy overnight, but you can’t. It’s events and the reaction to events that cause that. There has been a bursting of two bubbles in America – the subprime bubble and the credit bubble. Less has been said about the second of these – but basically the level of savings in the US (and the UK too) had fallen to almost zero and the population had become highly indebted. It couldn’t continue and a sea change was inevitable anyway. The subprime crisis triggered it.

What’s different about this economic crisis is the extent of the psychological change of the population, particularly the US population. Most likely it will take a long time for consumer confidence (by which we mean the tendency to spend) to get back to healthy levels. The only antidote to all of this is government spending and money printing, which is what the US is now preparing to do. The government has to compensate for the wary consumer and it’s only available tactic is to spend.