T he events of the past week demonstrate how far the process of financial globalisation has gone. The European Central Bank injected more than €155bn (£105bn) of liquidity into markets because unemployed workers in Detroit are defaulting on home loans they ob-tained during 2006 that did not require any down payment, principal repayment or documentation of income. In the 1980s those defaults would have led to a run on the local bank. In the current decade the loans have been securitised, repackaged in a collateralised debt obligation bond and sold to a hedge fund that bought it on leverage.

The shutdown of several hedge funds has scared the markets. There is no way to predict how many will fail because the markets for securities with subprime loans are illiquid and non-transparent. Hedge funds have valued the securities using models that give them considerable discretion in when to recognise losses. The subprime market began to implode in late 2006 but hedge funds did not recognise any losses on their securities until June. The losses have been so shocking that asset prices have declined sharply even for higher-quality securities.