(Please note that Figure 5 of this article was updated on 7 January 2009)

Introduction: A hostage to fortune! 

As we said last year, crystal ball gazing is a hazardous occupation at the best of times, and this year more than most!  Here’s what we said in December of last year: 

“As we look to the future and our baseline and alternative outlooks, the question of whether the credit markets will return to some kind of normality so that normal lending activities can resume will be key.  If central banks are frustrated in their policy endeavours by a continuing lack of confidence, they will find themselves “pushing on a string” and the ordinary stabilisers will not work.  This is the bleakest of all outcomes which would potentially lead the world into a long dark winter of recession, deflation and further credit losses.  This is the Japan problem writ large on a global scale and, once started, it could possibly last for many years.” 

Our mistake was that at the end of the day we plumped for the “Glass Half Full” scenario where Central Bank actions to inject liquidity would ultimately be successful. We could not bring ourselves to make our baseline outlook one where the financial system ceased to function, and yet that is exactly what has transpired.  We now find ourselves facing what is likely to be the worst recession since the depression.  And with the normal monetary policy transmission mechanism broken we are reliant on a Keynesian style fiscal response to break the vicious downward spiral of economic activity that we are currently in.

Read Alan's article in full here

You can read more about Alan's views on the policy responses required to tackle the financial crisis here