The Bank for International Settlements–“the central bankers’ bank”–has warned that “the difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed,” and that “the magnitude of the problems yet to be faced could be much greater than many now perceive.”
Historians would recall the long recession beginning in 1873, the global downturn that began in the late 1920s, and the Japanese and Asian crises of the early and late 1990s respectively.
In each episode, a long period of strong credit growth coincided with an increasingly euphoric upturn in both the real economy and financial markets, followed by an unexpected crisis and extended downturn.
In virtually every instance, some form of new economic discovery or new financial development provided a further ‘new era’ justification for rapid credit expansion, and predictably became a focus for blame in the downturn.
The report also states that “the eventual global slowdown could prove to be much greater and longer lasting than would be required to keep inflation under control. This could potentially even lead to deflation, which would evidently be less welcome.”