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We’ve become a nation of hypochondriacs. Every sneeze is swine flu, every headache a tumor. And at great expense, we deliver fantastically prompt, thorough and largely unnecessary care. There is tremendous financial pressure on physicians to keep patients happy. But unlike business, in medicine the customer isn’t always right. Sometimes a doctor needs to show tough love and deny patients the quick fix. A good physician needs to have the guts to stand up to people and tell them that their baby gets ear infections because they smoke cigarettes. That it’s time to admit they are alcoholics. That they need to suck it up and deal with discomfort because narcotics will just make everything worse. That what’s really wrong with them is that they are just too damned fat.  Unfortunately, this type of advice rarely leads to high patient satisfaction scores.  

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The answer can be summed up in one word: expectations. Once enough people start assuming that the government's response to any economic slowdown will be more government borrowing and spending, they can place financial bets on that assumption. For example, they can bet that the government will ensure that lots of money remains available in the economy, and that they can therefore raise prices accordingly, or demand higher wages. As these bets pile up, they dampen the effect of the intervention they anticipate, forcing the government into an even more extreme intervention to achieve the same result--further heightening expectations for future interventions. Eventually, expectations match the government's maximum feasible effort, and all interventions fail. Only a completely new, unanticipated form of intervention can hope to work.

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in list: Economic Crisis

It now appears that a large proportion of AIG’s $41bn in writedowns stem from its exposure to so-called supersenior instruments, or the most senior chunks of pools of debt backed by mortgage and corporate bonds.

Until last summer, these instruments were considered so utterly safe and dull that they carried a triple A rating and rarely moved in price. That was because these instruments sat so high in the capital structure that they only suffer losses if a tsunami of defaults occur – and in the halcyon days before the credit crunch most investors, and rating agencies, found it impossible to imagine such a shock. However, this once-unthinkable scenario is now starting to materialise in relation to some bundles of mortgage-linked debt, causing the price of supersenior debt to fall 30 and 60 per cent, according to different measures. That has created vast mark-to-market losses at the entities holding this stuff, such as Merrill Lynch and UBS. It has also hit AIG, both in terms of securities it holds and those it has insured.

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in list: Economic Crisis