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The value of Mr. Micawber

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

An awful lot of Americans have just worked out that they are at the wrong end of Mr. Micawber's recipe for happiness, in fact the number of Home repossessions has jumped 93% in the last year.

Despite the respite of the Fed's emergency rate cut on Friday, the markets are growing ever more nervous. The grouping of risk into complicated bundles like CDOs has made it a lot harder to identify where the potential credit losses might be. Although Banks had thought that they had sold their credit risk, hedge funds which they also own have bought these risks, with the consequence that first Bear Sterns and now Goldman Sachs and many others have been forced to take dramatic hits. In the giant game of pass the parcel in the credit markets, some unfortunate bankers have discovered that their parcels are ticking.


Until the market understands the scale of the losses that they face, they will not be able to price risk, and that level of uncertainty is dangerous. Already the Bank of England has announced that they have been supporting a UK credit institution that could no longer relay on their market counter parties for funding. If this goes on, then we could see a spate of emergency bank mergers.

The final analysis will have to wait, but it is hard to avoid the fact that the US consumer has been living on extended credit for many years now, and the distortion that this has created may require the US economy to- at best- tread water for a while. This is unlikely to be beneficial to the UK, which is one of the largest investors in the American economy.

Meanwhile the prodigality of the Labour government is putting much directly at risk in the UK. The lack of accountability for the spending of government money continues to reinforce dangerous distortions- in particular the failure to tackle the massive public sector pension deficit threatens to destroy British competitiveness within a pretty short run time frame.

Time is running out- a major overhaul of public sector finances is now urgent (and is also part of the Liberal Democrat proposals for government reform) but all that the Tories feel able to debate is gimmickry- turning right on red or extra bank holidays.

If the Tories can not address the dangerous road that Britain is being forced down by Labour, then is it too much to ask that they get out of the way?

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