Lehman Brothers, the world's fourth largest investment bank has gone bust, Bradford and Bingley was effectively nationalised (not to mention Northern Rock which started it all), Fortis Bank of Belgium was nationalised and the list is far from finished. When the City is in trouble the rest of the economy is likely to follow. It is worrying and we feel the anxiety in every part of our lives.
The problem stems from stalled inter-bank lending systems. Under normal circumstances bank lend money to each other at minimal interest above the official rate. However, since the economic downturn they each hoard their cash and only lend to each other at very high interest rates, effectively throttling the lifeline of every large western economy.
Further risks lie in the fact that banks in Western Europe are highly leveraged, they have 40% more loans than deposits, making them very vulnerable to fluctuations in the credit market.
I hear you say: "why should I care if a couple of over-paid City bankers lose their jobs?"
The answer is that if banks go bust, the ramifications are far and wide. Companies cannot invest and develop the economy. New property developments are already coming to a halt in the UK with immediate effect on the plumbing and heating industry. Companies that cannot borrow to invest also are not going to take on more staff. Since more people lose their jobs than people that find new jobs, there is less income for the general public to spend on home renovations and installing that new power shower that is well overdue.
Although this may sound very bleak there are other more positive aspects to it. Since the property market is slowed down, more homeowners have taken to renovate and improve their current home, since they do not want to move. Most renovations include re-decorating and some basic plumbing and heating work (new radiators, unvented cylinders etc.).
In any case, there are good signs that there would be a bounce back. With recession bringing less demand, it seems that commodity prices are coming down (including the all important oil). This will allow the Bank of England to lower interest rates, which would help company and home owners alike. The US government has pledged $700 billion as a special package to help the American banks out of their difficulties and other European governments are following suit.
It is undoubtedly one of the most difficult financial situations we had in decades, but there we are starting to see some flickers of light at the end of this tunnel.