As this tremendous expansion in borrowing was taking place, many Panglossian economists tried to rationalise what was going on. Some argued that this was “Bretton Woods II”, a kind of system of international exchange rate management. Others called it a “stable disequilibrium”, something that could be counted on to continue for some considerable time. What went wrong, as is now well known, is that a crisis in the subprime mortgage market in the United States sent a shockwave through the western financial system. Was this a black swan in Nassim Taleb’s sense of an event beyond the power of markets to predict? No. It was eminently predictable.

In essence, the rest of the world’s savings helped inflate a real estate bubble in the United States. Easy money was, as is nearly always the case, accompanied by lax lending standards. As invariably happens in bubbles, euphoria eventually gave way to distress and then panic. It began in the subprime market because it was there that house prices were least sustainable; it was there that defaults were most likely to happen. But the housing crisis in the United States is far from over. According to figures produced earlier this summer by Credit Suisse, a total of 6.5m loans could ultimately fall into foreclosure. That could throw as many as 13 per cent of US homeowners with mortgages out of their homes. At the time of writing, no one knows where the floor is for US property prices. Not since the Great Depression have we seen house prices declining at annual rates above 10 per cent.

What is more, the negative effects of this housing crisis on the American financial system have not yet fully manifested themselves. If the total losses on risky debt can be estimated at more than $1 trillion, yet only something like $400bn of writedowns has been acknowledged, and barely $300bn of new capital has been raised by western banks, there is a hole of at least $100bn in the financial system. Because of the way our credit system works, that implies a 10-fold contraction in bank balance sheets in the foreseeable future. Potentially, this could be a “great contraction” comparable with the one described by Milton Friedman and Anna Schwartz in their famous Monetary History of the United States.