Contagion’s next target is contemporary

Writing in the midst of turmoil, one is always at risk of being overtaken by events, but I have found myself vaguely approving of the recent market panic. The American housing slump has made fools only of those who thought house prices could go on rising steeply for ever; the resultant sub-prime lending crisis reminds us that you shouldn’t be lending money to people who shouldn’t be borrowing it; a few big painful reversals among hedge funds should curb the general arrogance of that industry; tighter credit is forcing the new blowhards of private equity to draw breath; and the Fed has been following Walter Bagehot’s admirable 19th-century advice that central banks should counter panic by lending willingly but expensively.

My touchstone at such times is my friend David, who runs a smallish hedge fund on Park Avenue. He has kept his distance from sub-prime mortgages, and was ‘down one per cent on the month, up five per cent on the year’, when I talked to him at the weekend.