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How well can an economy long characterised by soaring house prices, exploding debt and a dynamic financial sector adjust to a new world?
Martin Wolf, Financial Times May 1 2008

Attitudes to the new “special liquidity scheme” for banks tell us how little politicians want to consider the worst possibilities

But Mervyn King, governor of the Bank of England, says “the scheme is not designed to send the mortgage market back to the rather wild lending before the turmoil began last summer”. On the contrary, there “needs to be some adjustment in the housing market”.

Accept, then, that these official efforts are not going to bring back the credit boom and should also not do so. The last thing the UK needs is more highly leveraged purchase of overpriced houses. But how bad is the let-down for the economy then going to be?

The ratio of household liabilities to disposable income jumped from 105 per cent at the end of 1996 to 164 per cent at the end of 2006. This is much the highest ratio in the Group of Seven leading high-income countries, the US equivalent being just 138 per cent. Such a rise cannot be repeated.

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