How can the USA continue to function in a normal way, whatever normal is , when the country has debts of, is it $18 trillion ? Its so big I don't even know how many zero's it is ! And what do they do, they send more metal into space ! Crazy man, crazy !

Phil de Buquet, newport, England

Everyone seems to be getting in a terrible froth about this... hers another side to the story... yes funding availability for housing has reduced, yes certain hot spots (new build city centre flats) will see a pretty sharp downturn.

But I just wonder if Mr and Mrs average with manageable debt levels steady though unspectacular jobs, kids in local schools and friends all around are going to sell their houses if they don't have to (becasue of say a job move or need to downsize etc). If they don't sell ... which they won't ... then how will the market be characterised?

If there is a reduction I expect it to be sharp (say 20% over two years in city centre flats and poorer areas where there are endemic credit propblems) for the rest it will be perhaps 4 years of stagnation (drop in real terms of say 15% after taking inflation into account).

abharrisson, london,

Massive government intervention???

Well well well. When times are good it's all "set the private sector free from the state" but the moment things get a little scary, the right wingers go running back to clutch the skirts of Mrs N State.

The only solution to having institutions that cannot be allowed to fail is to nationalise them. No more moral hazzard. No more risk of greed and short-termism causing them to collapse and requiring the state to pick up the pieces.

Ian, Sheffield, UK

I respectfully disagree with your recommendations.

More government intervention into the markets is just more of the same toxin that is causing the problems.

"If, as seems likely, Americans curb their consumption spending significantly, asset values will fall further, forcing a renewed retrenchment by banks and financial institutions, a tightening credit squeeze, further declines in activity and so on."

Yes, that's exactly what should happen and is healthy. In times of economic distress, one should spend less and save more. That way the problem passes with the minimal possible pain.

The Feds cannot save us, they can only make the situation worse. Economists have understood this for two generations now. It would be helpful if columnists did, too.

Respectfully,
Jeff Perren
Sandpoint, ID USA

Jeff Perren, Sandpoint, ID

The same rules apply, the economy is based on the minimum wage in any country, So now we have a dangerous cycle of high food prices, high unemployment, and all new jobs created in the low skill low wage economies,High house prices, high taxes, low wage low skill high food prices,at some point the citiziens will ask who is living in the third world, the future is bleak with the price of oil to reach $150 within the next two years.

michael joseph heavey, cahersiveen>adams towns, madness

Why should my taxes be used to keep people in homes they cannot afford. House prices need to fall so the young can get on the ladder it is morally wrong to support peoples greed.

Gary French, Dallas, Texas

Well said eric campbell, 100% spot on there. House prices are 'obscene' and there current first time buyer generation should be up n arms about this.

Mrs A, London, UK

I like reading the paper on the net - firstly because it's free, but also to see all the silly comments. People really do get carried away don't they. Run to the hills!!! The skies falling!!!!

Things may get unpleasant but give me a break with all the doom and gloom. I know we're British and we get off on it but keep a bit of perspective. Go see a disaster movie or something to get your fix and let the optimists see this through.

Paul, London, UK

Some of us remember 1986 and the Savings and Loan scandel..How many Hundreds of Billions did that cost? 10% of the population left Houston and every Bank failed. Let the market sort itself out. Do not let the usual Politicians and Bankers slither out again. One thing is guarenteed, if the Government gets involved it will cost more, and last longer. It is an Election year so hang on to your wallet.

Desmond Taylor, Houston, USA Tx

The big financial disaster in making "stagflation rules OK". Whereas the UK and European monetary authorities are tackling inflation (in a rather half hearted manner as real interest rates are falling) the US is overwhelming the world with liquidity - where is all the cash coming from to speculate in oil, gold and other commodities - there is still no shortage of money to lend with massive liquidity awash the world - the price of this liquidity is too low as interest rates are far too low - the Fed is feeding a massive inflationary spiral which will make the solution to this problem ultimately far harder. The Bernanke put will make the Greenspan put look just like a drop in the ocean. Bring back proper monetarists to run monetary policy - Friedman et al and then we would not get into these messes into the first place.

Richard, Newton Abbot,

Just inflate even more then and watch the rest of the world dump the dollar. Then you'll have a crisis somewhat more challenging than property prices falling back to realistic levels.

WAB, London, GB

Give them the land the property stands upon. (I doubt they will walk away). Next,- turn a blind eye to bartering and the black economy for a while so that local tax can still be paid and somehow the mortgage can be paid, although at better aligned rates. It would cost the IRS less in doing so rather than tax give-aways and heavy tax take to pay for an alternative scheme such as loans and credits. After all, the tax take on higher gas and oil prices will provide extra revenue. give renters of housing the right to buy locked in by owning the land.

andre, London, Uk

This is Greenspan's legacy as a result from cutting the interest rate to a silly 1%, post 9/11. A spectacular success for Al Qaeda....

cww, suffolk,

Inflation-time is redistribution-time.

Ripping "money" off it's value forces the man in the street to pay the bill. Large debts shrink, little savings vanish.

Bye bye middle class

Peter Vernunft, Berlin, Germany

Ben Bernake has spent much time studying the recession of the 1930s. He will be an excellent position to study the recession of 2008.

Keith, Ashford,

Perhaps Wall Street bonuses from the past decade could be paid into a rescue fund ?

TomTom, Leeds, England

As usual, Gerard Baker is far too optimistic!

Mr Baker it is time to get real; vast amounts of mortgage and corporate loans will not be repaid. The tax payer (via Central Banks) will be forced to stand behind non-performing loans.

Costas, Cyprus,

Surely the problem in both the US and the UK is house prices. Neither population can actually afford to buy them without a lifetime of debt. The solution is not to pour more loans into housing, it is to allow house prices to return to affordable levels, or to have government control of house prices. Stephen Miles is right - British house prices are 'obscene' and provide layers of parasitic feeders - estate agents, lawyers, government departments and money lenders - with outrageously affluent lifestyles while the rest of us hand over half our salaries for at least 25 years just to provide a roof over our heads. To have an economy built on lifetime slavery to debt is the problem that needs addressing. There is no need for it. When house prices are brought down by 50% we will start to see some wood among the trees. When UK house prices are reduced by 75% or 80% life will be better for all except the parasites who feed on our interest payments. A crash will kill off the parasites. Good.

eric campbell, harrogate, uk

It is going to be a fun ride: we will see a massive rise in crime and a return of violent political protest. Only this time, the government, which has organised itself just for this event, will strike back with severe authoritarian measures.

Here is something many have not mentioned: there is a whole swathe of wealthy baby boomers, the very people who have made this situation, who were banking on a luxurious retirement of travel and dining options. But instead they will find their houses crashing, their pensions nuked, their cities not very pleasent places to dine out in, and travel risky as foreign locations run the risk of kidnapping and violent mugging. Oh, the chikens do come home to roost!

Bob Macdonald, London,

"The Government could, for example, offer to lend the necessary sums at very low rates of interest to those millions of borrowers in danger of defaulting on their loans."

Hyperinflation here we come.

Weimar Bernanke, Singapore,

I am not an economist, but I think that the main cause of the lending crises is not that lenders are fightened of lower asset prices (although this is a byproduct of the lending problems), but they are unable to work out whether people that they are lending to will be able to pay the money back. This has been because rates were far too low and uncredit worthy people were able to access easy money. Drops in USA interest rates are therefore only going to exacerbate the problem as lenders are going to think that their money, lent at ridiculously low rates, are going to end up down the drain again. Wouldnt it be better for the Federal reserve to keep their rates at least at a balanced level (about 5%) which would give lenders more certainty that they are going to get their money back?

James, Melbourne, Australia

England's credit markets and obscenely bubbled housing prices are next in line... reminds me of 'Bengal Lancers' because the spear is coming... only this time, there won't be any survivors. Do hang onto your hats, and good luck.

Stephen Miles, Fayetteville, NC, USA

The Home Owners' Loan Corp. Act of 1933 (HOLC 1933) did exactly this. Why our bumble-headed Congress doesn't seem to realize it is beyond reason.

Jim, Roscoe, USA