Credit crunch will get worse before it gets better
And no-one really knows where the grenades will be exploding, says Philip Delves Broughton
The agonies of the credit crunch carry on without any sign of relief. The groaning patient of the world economy has already endured sweats, shivers and acute stomach cramps. And sadly, we may only be halfway through.
Every day brings more grim news. Yesterday, it was the Germans' turn to say they haven't seen a domestic economy this bad in 15 years. British companies are slashing dividends in order to brace for a period of economic famine.
On Monday, the world's central bankers were wringing their hands at their annual meeting in the crystalline air of Jackson Hole, Wyoming. Stanley Fischer, governor of the Bank of Israel, told the meeting: "There is an enormous amount of uncertainty about where we stand at the moment" - banker talk for not having a clue. Though he did concede
"we are in the midst of the worst financial crisis since World War Two."
Charles Bean, deputy governor of the Bank of England, summed it up: "There are periods when markets look like they are getting better. Then another grenade explodes, another bout of fear of sustainability of some financial institutions, maybe intervention by the authorities."
The fear now dominates the political landscape. Hillary Clinton told the Democratic convention on Tuesday night that America's public finances had never been in worse shape, largely because the government had overseen massive "borrowing from the Chinese to buy oil from the Saudis."
Several months ago, a senior Wall Street banker posed this seemingly outlandish question about America's banking losses: "Is this a $500bn problem or a $1tr problem?" Well, we are already at $500bn in losses and write-downs on bad loans, while consumer and business debt, including credit card defaults, are only just beginning to mount.
House prices fell by 15 per cent in the US 
over the past year, leaving many consumers with no more home equity to borrow against. Suddenly $1tr does not seem so crazy - and the already exhausted bucket brigade at the Federal Reserve may be helpless in the face of such a flood.
Kenneth Rogoff, an eminent economics professor at Harvard, told a conference in Singapore last week that he thought "the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come. We're not going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."
How bad is it for the big American banks? Well, their earnings for the quarter from April to June were a ninth of what they were a year ago. Lehman Brothers is currently on death watch. While the rest of Wall St enjoyed its summer, Lehman's bankers have pounded away at their phones trying to avoid the humiliating fate of Bear Stearns, perhaps by selling a chunk of itself to an Asian bank.
Citigroup just instructed its staff to avoid making colour photocopies and to use both sides of the page for internal documents. When a bank of that scale is looking to its stationery budget for savings, you know everyone is in trouble.
Even JP Morgan, a bank thought to be riding out the storm better than most, announced this week that it was writing down $600m of its stake in the two crumbling pillars of America's mortgage industry, Fannie Mae and Freddie Mac.
When the crisis began, many looked to the sovereign wealth funds of the Middle East and Asia to open their wallets. That seems to have stopped. Japanese companies, flush with cash, are now on the march, buying up industrial firms in Europe and America.
But a few billion here and there is not enough. Bankers are now using the term 'negative feedback loops' to describe the next phase of this debacle. House prices fall, consumers can't borrow, companies can't sell and on it goes. Those tin hats should stay on for at least for another year. 
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