Credit crunch will get worse before it gets better

The agonies of the credit crunch carry on without any sign of relief. The groaning patient of the world economy has already endured sweats, shivers and acute stomach cramps. And sadly, we may only be halfway through.

Every day brings more grim news. Yesterday, it was the Germans' turn to say they haven't seen a domestic economy this bad in 15 years. British companies are slashing dividends in order to brace for a period of economic famine.

On Monday, the world's central bankers were wringing their hands at their annual meeting in the crystalline air of Jackson Hole, Wyoming. Stanley Fischer, governor of the Bank of Israel, told the meeting: "There is an enormous amount of uncertainty about where we stand at the moment" - banker talk for not having a clue. Though he did concede

"we are in the midst of the worst financial crisis since World War Two."

Charles Bean, deputy governor of the Bank of England, summed it up: "There are periods when markets look like they are getting better. Then another grenade explodes, another bout of fear of sustainability of some financial institutions, maybe intervention by the authorities."

The fear now dominates the political landscape. Hillary Clinton told the Democratic convention on Tuesday night that America's public finances had never been in worse shape, largely because the government had overseen massive "borrowing from the Chinese to buy oil from the Saudis."

Several months ago, a senior Wall Street banker posed this seemingly outlandish question about America's banking losses: "Is this a $500bn problem or a $1tr problem?" Well, we are already at $500bn in losses and write-downs on bad loans, while consumer and business debt, including credit card defaults, are only just beginning to mount.

House prices fell by 15 per cent in the US