You know you're in the grip of globalization when a spate of housing foreclosures in America results in hundreds of Britons lining up outside a bank, desperate to get their money out.
But as Britain takes stock after narrowly averting the collapse this week of its fifth-largest mortgage bank, Northern Rock, economists are pondering lessons learned from the country's gravest financial crisis for 15 years – and wondering where the global credit crunch will strike next.
Some point to Ireland and Spain, whose housing booms in recent years have stoked concern of a vulnerable property bubble. Others note that the credit crisis is buffeting the German banking sector, while Britain may also not be out of the woods yet. Thus far, the crunch appears to have spared Asia.
But since the extent of the fallout from the US subprime crisis is unknown, such predictions may be premature.
"The problem is that no one knows how deep the problem is," says Howard Archer, an economist at the Boston-based financial analysis firm Global Insight. "That is what makes it so hard to predict. One of the reasons that banks have been so reluctant to lend to each other is because no one knows where this bad debt is."
That led to a crisis for Northern Rock, a long-established lender that borrowed from other banks to fund its short-term commitments. When those funds dried up as a result of the chronic mistrust gripping a banking system unsure of who was sitting on bad debts, Northern Rock was forced to seek emergency funding. A "run on the bank" by account-holders ensued.
"We panicked," says Reg Harding, who tried and failed to take his £50,000 ($100,336) in savings out of Northern Rock's Kingston branch last Friday because the lines were so long. "They should have a deposit protection scheme like they do in America."
Risk ahead: more risky lending
The response from the authorities has proven controversial, but instructive for others who may face turmoil in coming months. For several days, the Bank of England argued that intervention would amount to "moral hazard," sparing risk-takers the full consequences of their losses. But when British TV showed lines of people, many of them elderly, queuing up in desperation, the authorities quickly said all deposits would be guaranteed.
This blank check has provoked criticism. Willem Buiter, a former member of the Bank of England's monetary policy committee, said the move was tantamount to "insuring free of charge all deposits in the UK banking system. It ... showed a loss of nerve."
Some argue that Britain should now install a bank deposit insurance program similar to America's. Others are calling for greater transparency so that parcels of questionable debt cannot be blithely parried around the global financial system.
Julian Jessop, a global economist with the London-based consultancy Capital Economics, says that the British move was justified. "The alternative of allowing people to lose money from a deposit account ... would have caused such problems in the wider economy that it was worth the moral hazard."
But he adds that the global economy is not out of trouble yet. The move by the US Federal Reserve this week to cut interest rates has restored a lot of confidence, as have cash injections into money markets by central banks in Britain, the US, and Europe. But Mr. Jessop identifies two risks going forward.
"One is that there are still big underlying problems that one or two rate cuts can't patch up," he says. "The other is that central banks are too successful and people become complacent again and there is another crunch further down the line."
Marco Onado, an Italian economist at Bocconi University in Milan, concurs. "The likely scenario is that lower interest rates will be a great help to borrowers all over the world and to the housing sectors in the US and UK – and so banks can go on giving out loans without looking carefully to the risk they take."
This of course was the original problem: Five years of low interest rates lured the global financial system into complacency and led to this so-called subprime crisis.
Limited impact so far
But although there's talk of a global credit crunch, the impact so far is limited. "It's only really in the US and Europe, and even there a number of smaller economies like Sweden, Norway, and Switzerland have all avoided it," notes Jessop. Asia has proved largely immune, though Japan is keeping close tabs on how the crisis is affecting the US economy, its largest export market.
Mr. Buiter believes that the worst is over for Britain, but that the picture differs country by country for the rest of Europe.
"Places like Ireland and Spain have had crazy housing booms and will have a lot of local subprime debt in the system so I wouldn't be surprised if there were issues there," he says. He adds that German banks in particular have indulged in the sort of off-balance sheet financing that has enabled bad debt to be funneled around the financial system.
Two banks, IKB and Sachsen LB, have required bailouts. Yesterday, the granddaddy of German banking, Deutsche Bank, admitted that its bottom line would take a hit from the crisis. A survey of German financial experts this week found that two-thirds believe that the crisis could pummel the global financial system for weeks to come.
The effects are expected to crimp economic growth, but not throw the global economy into reverse. But there could be an indirect effect on consumer spending, particularly in Britain where the scent of panic on the high street may be enough to encourage some belt-tightening.
"There will be foreclosures on a larger scale in the UK," says Buiter. "There is quite a lot of unsecured debt, credit-card debt – some of which has already gone belly up, and in the US and Europe there is a lot more credit-card receivables and debt that is doubtful.
"There will be pain both in households and in businesses exposed to them, but it should be manageable without a major slump," he says.