The world's financial markets are as good at generating gossip as they are at creating – and occasionally destroying – wealth. All manner of rumours are circulating around boardrooms and bars about who will be next to reveal embarrassing losses, lay off staff and go cap in hand to their central bank for help. A few small banks, in unexpected corners from Australia to Germany, have already effectively gone under. There will be more of these casualties. For now, though, attention is rightly fixing on the origins of the present crisis – the "subprime" phenomenon in the United States. Yesterday even President Bush, who has shown scant interest in the welfare of those at the bottom of the American pile, recognised that, on economic and humanitarian grounds, subprime borrowers need to be rescued, at last, from themselves.
Shoring up their position and helping them to remortgage will ease the pressure on the international banking system, helping to build up confidence that a wave of defaults is not about to overcome otherwise robust Western economies. It will probably prove to be the largest federal intervention in the property market since the 1930s, running into tens of billions of dollars. The President says that he's not interested in a bail-out of speculators. That should be the least of his worries. He will have to work hard to avoid a "home-made" recession. The tax dollars will be money well spent if they spare the world from a vicious slowdown, with all the consequences that has for unemployment and more misery. George Walker Bush is paying an unexpected tribute to Franklin Delano Roosevelt. Faced with similar problems in the Depression era of the 1930s, FDR devised policies which Mr Bush is following today. Indeed, the federal agencies that must implement them date from the time of FDR. Dubya, like FDR before him, is wise to address the roots of the crisis.
Too many people in America, it has become apparent, were lent too much money to buy real estate. They had poor credit histories, low earnings, few assets. Cheap, enticing and initially affordable deals were struck to hook customers anxious to own their own home. Now, as those deals expire and interest rates have risen, their budgets are so tight that they can no longer afford the roof over their heads. They will be homeless. Even historically low rates of interest are too much.
On any normal, past, prudential grounds they should not have been permitted to borrow such sums. Bankers used to ask whether home-owners could afford to make their repayments in bad times as well as good. Deregulation, fierce competition and easy credit left such questions unasked more recently. Other solutions – shared ownership, social housing – ought to have been found. Instead banks that made the loans packaged up the debts and sold them on and on – and off they went into a sort of global financial game of "pass the parcel". The credit agencies and the banks lost track of the risks that went with the above-average returns on these funds. Nobody quite knows which of these parcels of mortgages are ticking time bombs of subprime defaulters. Hence banks won't lend to each other and the credit markets seize up. President Bush's initiative will help to ease that situation.
It will eventually need to be done in the UK. The Financial Services Authority has published appalling accounts of the behaviour of subprime lenders here; few checks on declared earnings, fewer on whether mortgagees can afford repayments; nowhere adequate procedures. At about 8 per cent of our mortgage market such failings matter. Before long we may need our own tribute to FDR.