"Crash" is a dangerous word. No one has managed to define it precisely but, like a juggernaut that careers off the highway, slams into your house and parks itself in your lounge, you certainly know when you've been hit by one, even when you can't quite believe it or explain how it happened.
It feels a little like that now on the world's stock markets, though the rumble of approaching catastrophe could be detected for some months. When even the United States Treasury Secretary, Henry Paulson, admits the turmoil will "exact a penalty" on the US economy's growth rate, then things are bad.
Until yesterday, it was possible to believe the markets were experiencing a "correction". That term now looks ludicrously euphemistic. Yesterday alone saw a collapse of 250 points in the FTSE 100 index, wiping 4.1 per cent from its value as it slumped to 5,859.9, well below the 6,000 mark, a psychological barrier. It is the biggest fall since March 2003. The loss since Wednesday stands at well over £100bn.
No market and hardly a stock escaped the carnage; in Tokyo the Nikkei closed down 2 per cent, Singapore lost 3.7 per cent, Korea down 7 per cent, France 2.6 per cent and Germany 1.7 per cent. Most crucially, because of the lead it offers the rest of the world, in New York shares pulled off a late-trading rally to end just 0.12 per cent down on the day - despite losses of about 2 per cent in early trading. But traders there remain nervous. The scale of the losses early in the day and the images of panicky dealers staring at screens a sea of red were reminiscent of the crashes of 1998 and 1987. Indeed then, as now, the abrupt end of a bull market followed a period of unusually easy credit, with excesses and scandals all about.
The comparison with 1987 is frightful. Then the Dow fell by 3.8 per cent and 4.6 per cent on the Thursday and Friday before Black Monday, at which point it lost 22.6 per cent of its value in one day. Even if it is not as bad as that, the party seems to be over.
Like a tiny bacillus laying low a vastly larger and, otherwise healthy organism, a crisis in one, relatively small, sector of the US mortgage market - "sub-prime" lending - has multiplied and spread to almost every corner of the global economy.
Sub-prime lending has been defined by the US Treasury Department as granting funds to those who "have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies". In other words, people who probably should not be borrowing money at all.
Losses in the sub-prime sector are thought to run to about £50bn. Compare that with the hundreds of billions wiped off the value of shares in the past few days alone, and whatever sums it will cost central banks, taxpayers and shareholders to prop up ailing companies. This infection has done harm quite out of proportion to its origins.
The reason for that is the growing liberalisation, sophistication and globalisation of financial markets. The American banks that undertook this sub-prime lending were able to package up the debts and sell them on to banks, hedge funds and other investors from Zurich to Shanghai. This "securitisation" of the debt was designed to spread the risk, or exposure, around, with investors attracted by the unusually high returns on these funds.
Fine; except the US housing slump has activated the sub-prime virus and no one has much idea where this flaky debt is now sitting. Hence the panic, the gossip, and the rapid intervention by the Federal Reserve, the European Central Bank and the Bank of Japan to lend huge sums of money to prevent the financial system seizing up ("an injection of liquidity" to the cognoscenti).
Over the past week, the Fed has injected $88bn (£44.3bn), while the ECB has put up €211bn (£142.6bn). So will the virus spread out of the City and into the "real economy" of jobs, pensions and housing? Yes, because the value of pension funds and savings has already been slashed. When companies find it harder to raise capital - because of the "credit crunch" and the collapse in shares, they find it trickier to fund investment.
When that vital commodity - "confidence" - goes into short supply, consumers tend to take fright too. We might not get all that goes on in the City, but maybe now is not the moment to splash out on that new car or, indeed, gear up for a bigger house.
So there is a chance that house prices, already weakening, will start to stagnate, as is happening in the commercial property market. That would be no bad thing - especially for first-time buyers - provided unemployment does not creep up. If that happens then repossessions and a fire sale of buy-to-let property could follow, and we would have our own sub-prime-style crisis. The authorities are haunted by such a turn of events. True, we have a more benign global background of high global growth (about 5 per cent), more broadly based (with China and India) and still low inflation and unemployment. But the Bank of England and the Government will have to do a good deal - cutting the base rate, increasing public spending - to restore confidence.
A Treasury spokesman said: "The UK economy remains strong, against a background of a strong world economy. There will always be periods of uncertainty in the markets, but the long-term decisions the Government has taken - giving independence to the Bank of England, the fiscal rules and low and stable borrowing - have created a strong platform.
"The UK economy is experiencing its longest unbroken expansion since records began... Our openness and flexibility continue to position the UK to benefit from the opportunities of globalisation and absorb shocks."
The impact on financial sectors
UK pension funds will have had their value fall in tandem with the exchanges. Those funds that have benefited from putting money into hedge funds and private equity ventures may see some or all of those investments in jeopardy. However, post-Maxwell, new protections should have made abuses less likely.
The big danger. If growth slows appreciably and joblessness rises then we could see some panicky selling. A welcome slow down in house price inflation could turn into a slump, with a "rush to the door" by marginal buy-to-let investors and other speculators. Negative-equity misery could re-emerge.
Much depends on the reaction of the authorities. A loss of confidence in financial markets can easily affect consumer behaviour (spending less, saving more) and companies (who usually hold back on large investment plans). A reduction in interest rates and, in time, a boost from the Budget would help calm nerves.
Can cut both ways. Voters tend to "cling to nanny" in turbulent times, especially if they're not confident in the Opposition. On the other hand if electors blame Mr Brown for the crisis then things look better for the Tories. In any case, the Prime Minister doesn't have to go the country until 2010.Reuse content