The financial crisis: How bad is it?

As the global markets reel from one calamity after another, nobody can be sure when the turmoil will end. Leading figures from the worlds of finance and economics offer their analysis of the deepening crisis
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Alan Greenspan, former chairman, US federal reserve

"Particularly hard hit will be much of today's financial risk-valuation system. It will eventually fail and a disturbing reality will be laid bare ... It is important, indeed crucial, that any reforms in ... the structure of markets and regulation do not inhibit our ... safeguards against cumulative economic failure: market flexibility and open competition."

Robert Rubin, Former US Treasury Secretary

"I believe the risks are serious enough to call for substantial additional action in the mortgage area, assuming that measures can be adopted that, when the pros and cons are weighed out, are sensible. With respect to economic risk ... I have been around financial markets for a long time and I believe we are in somewhat uncharted waters."

Lawrence Summers, former US treasury secretary

"The underlying illness is serious financial problems and a major credit crunch. That means doing things about mortgages. That means infusing capital into financial institutions. It's a near-certainty [the US] is in a recession and there is a real prospect that it could be a serious one without strong policy action."

Alan Blinder, former economic adviser to President Clinton

"The Fed has been playing the equivalent of Whac-A-Mole as financial turmoil keeps cropping up in unexpected places – yet many of the problems are beyond its reach. Whether we'll have a technical recession remains to be seen. Even if we don't, we're skittering along at very minuscule growth rates."

Terry Smith, chief executive, Tullett Prebon

"I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this. I don't think anybody alive has seen events of this seriousness and magnitude affecting the markets ... High interest rates didn't cause this problem, so lowering them isn't going to solve it. It is hard to see exactly what tools the authorities do have."

Vince Cable, treasury spokesman, Liberal Democrats

"The longer the credit crunch grips the money markets the more likely it is we will see bank failures and the more serious the repercussions will become on the wider economy. There is now a serious danger that higher costs of borrowing falling on consumers and business will cause an even more rapid slowdown in growth than currently forecast."

George Magnus, senior economics adviser, UBS

"How close is the financial industry to recognising the full value of the writedowns? I'd be surprised if we were more than a third of the way through. Once this gathers momentum it is very difficult to stop. The economic implications are far worse than people think, and the policy solutions far more dramatic."

Richard Bernstein, US strategist, Merrill Lynch

"The demise of Bear Stearns should be viewed as the first of many. Assets remain overvalued, earnings momentum is weak and sentiment is catching on as to how broad and deep the credit market bubble has been. In the 1989-1991 cycle, about 25 per cent of financial sector companies went away via merger, acquisition, or bankruptcy."

Stephen Lewis, economist, Insinger de Beaufort

"Many of the biggest market makers in the credit area have been severely damaged and that has severely reduced their capacity to take risk, any sort of risk. Capital is very scarce because so much of it has gone to fund the write-downs. Managers are very averse to taking any kind of position in the market that might go the wrong way and wipe out a bit more of their capital."

Nouriel Roubini, Professor of economics, Stern Business School

"This is the most radical change and expansion of Fed powers and functions since the Great Depression: essentially it now can lend unlimited amounts to non-bank, highly leveraged institutions that it does not regulate. [By doing this] ... the Fed is taking serious financial risks."

Julian Jessop, Chief international economist, Capital Economics

"[The US Federal Reserve's measures underline] both the seriousness of the financial crisis and the Fed's determination to pull out all the stops to prevent it from getting any worse. The most worrying aspect is that the Fed felt it could not wait until its scheduled one-day meeting tomorrow."

Tim Steer, fund manager, New Star Asset

"It's time for the banks to face reality. This crisis is of the banking sector's making and it is high time banks faced up to their combined responsibilities, put their collective heads together and found a way out of it. Magic wands, like those waved by Bernanke are all very well, but aren't a lasting solution."

Melanie Mitchley, director, Callcredit

"This should be a real wake-up call to consumers. People need to start thinking about how the reality of the credit crunch is going affect their own financial situation ... A quarter of all UK consumers have become more concerned about their finances and confidence has been shaken. Consumers need to move from the buy now, pay later attitude to the save now, buy later mentality."

Stephen King, MD, economics, HSBC

"It's as if financial investors have almost given up on America. In the early 2000s, they gave the US economy the benefit of the doubt, replacing equities with investments in new, mortgage-backed securities. These were ultimately no more than loans to a housing market which turned to dust."

Philip Shaw, chief economist, Investec

"The Bank of England's actions highlight the extent to which the UK is vulnerable to the dislocations in credit markets. The thinking is that if technical measures to reintroduce liquidity to markets fail, the MPC could cut the bank rate more aggressively."

Reporting by Simon Birritteri