The likelihood of a credit crunch, though not its exact form, was in fact well forecast by the regulatory community. The Bank for International Settlements had been predicting it for years and most other authorities had been warning about the underpricing of risk and the probability of a sharp reversal for some time.

 The main problem is not the structure of regulatory oversight, either national or international, but the lack of counter-cyclical control mechanisms or instruments. Having foreseen the danger, the regulatory authorities did not have the instruments to do much about it. The Basel regime for capital adequacy does nothing to constrain credit booms. Its effect, if any, on the crunch will be to deepen it further.