HISTORICAL CONTEXT:YESTERDAY'S FRESH outburst of panic on global markets was final proof that as financial crises go, we are now in the big league.Comparisons with the dotcom bubble or even the Asian crisis of 1997 are inadequate. We must think of 1987 or 1929.
With hindsight, 1987 was much more contained than today. The brief, savage fall in world equities seemed the prelude to an equally severe downturn in the real economy.
But the real world sailed on, and other asset classes were largely unscathed.
Compared with 1929, there are two major differences today. First, world policy makers grasped the scale of the threat more quickly and are prepared for much more drastic action.
Against that, the financial system is much more complex. And thanks to modern communications, the pace has accelerated enormously.
So any given policy action is uncertain in its effect and generally out of date by the time it arrives.
As an example of complexity, it now seems clear that the US authorities were mistaken in allowing Lehman Brothers to go under.
The effect has been that of a breakage in a fast-running piece of precision machinery, with metal flying off at all angles.
One big unexpected effect was the severe loss of confidence by investors in money market funds and the further seizing up of the money markets themselves. The fact that such an outcome could not be foreseen by the US Treasury secretary Hank Paulson - arguably the best-informed man in the financial world - is further proof that the system has become too complex to control.
A further perverse effect came with the rescue of the US mortgage entities Fannie Mae and Freddie Mac. This caused chaos in the enormous and murky world of credit derivatives - further compounded by the Lehman failure.
The existence of credit derivatives and of the shadow banking world, represented by off-balance sheet entities such as special purpose vehicles, means investors are still in the dark as to where the true damage lies in the banking system.
Again, the fact that this remains true some 15 months after the crisis erupted suggests that clearing up that damage will be a very slow process.
Some details of yesterday's market behaviour also remind us that the crisis has moved well beyond the banking system. Mining stocks were savaged yesterday in London, with the Kazakh copper miner Kazakhmys - a member of the FTSE100 index - down 27 per cent at the close on the day.
That, along with yesterday's steep falls in emerging markets, is further proof that investors now expect a serious slowdown in the real global economy.
And unlike 1929, the causation is fairly clear.
While it is still a matter of debate why the Wall Street Crash was followed by the Great Depression, this time the story is a simple one of leverage. The developed world took on too much debt and that is now being brutally unwound. - ( Financial Times service)