FT.com – Dubai reveals the fragility of finance

Via FT.com / Comment / Editorial – Dubai reveals the fragility of finance:

Such nervousness is the result of continuing financial fragility. The economic crisis was caused by a build-up of leverage. As the crisis unfurled, policymakers rescued debtholders, rightly betting that the best escape route was to meet obligations to creditors and then rely on future economic growth to make debts manageable.

As a result, the financial system remains over-leveraged and undercapitalised. Growth may be returning and green shoots breaking through, but this week has confirmed that the world is not yet in the clear. The financial system remains fragile. Losses and clouds of uncertainty, such as those now hanging over the Gulf, can still trigger skittish sell-offs.

There is continuing financial fragility because very little has been done to address the root cause of our difficulties: artificial credit expansion. However, although commentators may insist on using phrases like “a build-up of leverage”, at least they accept that excess credit caused the crisis.

Now what is to be done about it?