From Northern Rock to Lehman: who should share the blame?

Martin Jacomb assesses the extent of the damage to the banking system so far — and the effectiveness of responses by central banks, regulators and lawmakers

Will it be short and sharp, or drawn out and deep, with lasting damage? A recession is upon us, but no one knows its path. Its course and its force are, like Hurricane Gustav’s, unpredictable.

It is already more than a year since it all started. Banks everywhere have made enormous losses; some, even important ones such as Lehman Brothers in New York, have collapsed, and more may do so. They are being blamed for the catastrophe. But it is not as simple as that.

A decade of the miraculous combination of low interest rates and low inflation inevitably led to banks lending ever higher volumes to riskier borrowers. Conditions in credit markets awash with easy money were made to seem even more benign with the growth of securitisation.