This book argues against the widespread extreme pessimism about the world's banks and the quality of their assets. Yes, there was an unsustainable build-up of mortgage debt in the United States, the United Kingdom and other countries over recent years. Yes, many in the banking industry failed to anticipate the ending of this consumer credit boom and so exposed their fi rms excessively when the bubble eventually burst. There were many poor lending decisions. Banks have lost a great deal of money on US sub-prime mortgage lending and on the ‘leveraged loans’ to speculative-grade private equity buyouts. But the problems that are now causing such a widespread and severe contraction of credit are the panic responses to this situation, the lack of buyers for illiquid assets, the withdrawal of short-term funds, the lack of trust in banks and the fear of how deep the current downturn can yet become.

This is a key policy issue. Every fi nancial crisis is unique, but every crisis raises much the same questions about how governments and fi nancial authorities should respond. Should government and the fi nancial authorities stand aside and let private businesses and individuals suffer the consequences of their own actions? Or should public funds be used to protect borrowers and investors from the consequences of their decisions? In the case of fi nancial panic the answer is clear. The solution is long-term fi nancial support and in an extreme crisis only the state is in a position to do this.