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Maybe Wall Street's rocket scientists and the City of London's masters of the universe should have spent more time reading Greek tragedies and less time reading their spreadsheets. As Aristotle could have told them, over-confidence is always punished.
With their computer models and PhDs in financial engineering, some of the brightest minds in United States banking had spent the past decade devising ingenious, albeit opaque, ways of making eye-watering profits, founded on the unshakeable belief that they had discovered a new, fool-proof way to manage the risks associated with lending money.
To those queueing outside the British bank, Northern Rock, last week in the panic to remove their precious nest eggs, the models may as well have been written in Klingon for all the British public understands of how they worked or indeed why they have come to exert such a powerful influence over their lives.
But the rocket scientists' model was actually quite simple: the American underclass would be turned into an asset by offering them mortgages, which they had traditionally been denied. Of course, they would have to pay more for their home loans than normal because they were such risky debtors. But the rocket scientists believed they had insured themselves against the risks by selling the loans on to other institutions in complex financial bundles of debt.
Unfortunately for the rocket scientists, their Ferrari dealers, their trophy spouses waiting for those post-Christmas bonuses to buy the chalet in Aspen, and pretty much the rest of the world, they were stunningly, catastrophically wrong.
And the problem for the world now is no one - not Northern Rock customers, not the Bank of England, not US Federal Reserve chairman Ben Bernanke, who slashed benchmark US interest rates by a half-percentage point this week in a bold move that will have truly global implications, knows yet just how wrong the rocket scientists have been.
Gertrude Robertson could give them an idea. The 91-year-old widow, who lives in Seattle on America's West Coast, was one of hundreds of thousands of poor Americans offered a mortgage by lenders keen to profit from the rocket scientists' ideas. Robertson signed on the dotted line. She knew little more than that her broker assured her it was a good thing.
"Some words I don't understand," she told the New York Times. "When I heard the lady I used to work for tell someone that I was the 'epitome of cleanliness', I went home and cried. I thought I was going to be fired. I didn't know what it meant."
Nine months later, Robertson is facing eviction and has been dragged into a court case to cancel fees she did not understand. The company that loaned the money is in bankruptcy protection.
In January, she was persuaded to take out a US$450,000 ($615,207) mortgage. But then her part-time job as a carer disappeared, reducing her income to a social security payment of US$1500, while her loan spiralled to US$475,000.
She has had no choice but to put the house on the market, triggering an early payment penalty of $14,400.
The temptation is to say the likes of Robertson should never have been given a home loan in the first place. But for a while the idea worked. The poor workers in the US, often black or Hispanic, were able to get on the housing ladder for the first time, stimulating a surge in demand that created a property boom.
And, for a while, the good times rolled as the property market, not just in the US but most of the world, seemed to defy gravity. More lenders rushed in to meet the demand, sending property prices spiralling ever higher. Television adverts for such loans dangled the prospect of home ownership as a step towards realising the American Dream. Aggressive salesmen persuaded the poor and vulnerable this could be their route to prosperity.
The hard sell worked: some US$600 billion of sub-prime loans, as they were called, were made to Americans last year. The rocket scientists parcelled up the loans into different packages, so that the debt owed by the likes of Robertson was mixed with that of less risky debtors much less likely to default. These parcels of debt were attractive to other avaricious financial institutions, notably hedge funds. Whereas the institutions could achieve only a single digit return on buying "safe" assets such as US Treasury bonds, by taking a risk and acquiring sub-prime debt they could benefit from double digit returns. It was the closest thing Wall Street had seen to alchemy since the dotcom boom. And everyone knows what happened to that ...
And then the wheels came off the great US property wagon. The likes of Robertson started losing their jobs, triggering huge defaults, as the US economy faced a downturn. Repossessions soared; people found themselves homeless. Initially, few were concerned about their plight. It seemed theirs was a relatively parochial problem not of interest to high-flying financiers.
But it is now evident that what is happening in places like Seattle has ramifications that are being felt thousands of kilometres away in places such as Newcastle, England, headquarters of Northern Rock.
Because Robertson's debts had been bundled with other debts and then parcelled out to other financial institutions, the entire global banking system has been infected by America's problems. As a result, banks have suddenly got nervous about lending more money to each other, afraid they might not get it back.
Amid the turbulence, Northern Rock, which relied on borrowing from banks in the short term to keep its business model running smoothly, found itself in the middle of a credit crunch, unable to access cash. That the Bank of England had to step in to bail it out was an ignominious marker in the history of one of the UK's fastest growing financial institutions.
More alarming is that we know of Northern Rock's problems only because it is heavily regulated. Offshore hedge funds and other secretive institutions are not nearly as well monitored.
"In some sense you can call what is happening a crisis of confidence," said Viral Acharya, professor of finance at the London Business School. "But it is really a crisis of information. No one knows who is holding what paper."
Some estimates suggest there could be up to US$1 trillion of losses on sub-prime mortgages and the complexity of the legal packages they've been poured into means it may take months to work out where the buck stops.
Many are traded off-screen which makes monitoring their true value difficult, in some cases impossible. Given the problems in the US it is unlikely Northern Rock will be the only UK bank forced to go cap in hand to the Old Lady of Threadneedle Street, as the Bank of England is known in the City of London, the British capital's financial district.
Meghan Faux, co-director of the Foreclosure Prevention Project, an organisation run by a New York legal firm to defend victims of mis-selling, said it received 12 calls a day from the Robertsons of this world.
"We have seen a proliferation of these exotic mortgages in the past two years," she said.
"We have seen the elderly, African-Americans and Hispanics sold totally unaffordable and unsustainable loans through deceptive practices.
"It's made to look like a great deal at a fixed rate of 1 per cent, then it turns out to be fixed for one day only, going straight up to 8 per cent. There are people who have lived in their homes for 20 to 30 years and have got cornered by a broker who said, 'I can get you a 1 to 2 per cent fixed loan.' The papers are confusing and the loan proves totally unaffordable. One elderly client, who'd lived in the same property since the '70s, has a monthly income of US$600 and found herself with a mortgage over US$2000."
The one certainty amid the chaos of the credit crunch is that money is going to become harder to come by. For British consumers, whose total household debts including mortgages are now worth well over £1 trillion ($2.76 trillion) - more than an entire year's GDP for Britain - the omens are not good.
"The money market issues will probably mean that mortgage rates will suffer," said Jamie Dannhauser, of Lombard Street Research.
"As bank profits get hit, they're going to do two things: tighten up lending standards and increase rates."
Already many of the major mortgage lenders have raised their lending rates and pulled some of their more attractive offers off the market. Coming after five successive interest rate rises by the Bank of England, few analysts are now betting against Britain's housing market undergoing a correction.
Linda Cook hasn't rented a property for years. She and her husband have long had their feet wedged firmly on the property ladder and, only a few months ago, accepted an offer on their house in the Berkshire, England, market town of Newbury for close to the asking price. Yet the other day Cook found herself stopping off at Dreweatt Neate, the local estate agent's, to ask about rental properties.
"We would like to buy now but we are struggling to find a two- or three-bedroom property that we like in our price range," Cook said.
Inside Dreweatt Neate last Friday, the phones rang constantly with inquiries but estate agent Andrew Maddock said the market had cooled in the past year.
"Interest rates creeping up and people feeling squeezed financially are having an impact," he said. "There are fewer people looking to sell and buyers are being more cautious."
Maddock took a call from a seller who had put his property on the market at £440,000 but had been offered £400,000. "A 10 per cent discount is a bit of a cheeky offer but the seller is now considering £415,000, something he probably wouldn't have done a year ago," he said.
Estate agents up and down the country are reporting a cooling market, with all saying they are having to manage sellers' expectations carefully.
The latest report from property website Rightmove will not have helped ease sellers' worries. Released last week, it shows that for the first time this year prices in Britain fell between August and September by an average 2.6 per cent. Even London, previously impervious to house price falls, has seen prices drop by 2.5 per cent in the past month.
Miles Shipside, commercial director at Rightmove, played down talk of an impending housing crash. "We estimate that around half the 2.6 per cent fall is down to the effect of home information packs," he said. "We had a spike of four-bedroom properties on to the market in July as people rushed to beat the deadline and avoid them. Then we had a dearth of these properties and that is what has skewed the figures."
Yet Shipside believes monthly house price reports will continue to show slight falls in asking prices and this will slow down the annual rate of house price inflation to about 3.5 per cent, from a high of 13 per cent three years ago.
Outside Dreweatt Neate's window last week, Mary-Ann Ferneley stopped to peruse the properties for sale. Holding her daughter Elizabeth's hand, she pointed to a four-bedroom house on at £420,000. "That is the only one I would consider but even that is not really what we are after.
"We have pretty much decided we are now going to wait and see if prices come down. Looking at the extortionate prices does make you think, can we stretch ourselves? But we are in uncertain economic times and I don't feel it's worth the risk."
As Chancellor Alistair Darling and Bank of England Governor Mervyn King flew to Portugal last week for a summit with European finance ministers, queues of anxious customers were forming around the block outside branches of Northern Rock to withdraw their savings. It was an unprecedented sight that conjured up images of the run on the bank in Frank Capra's It's A Wonderful Life.
But there was no Jimmy Stewart to reassure worried savers.
"They tell you not to panic, so of course you're going to panic," said one customer outside the Golders Green branch, in north London. "My life savings are with this bank and I do not want to lose them."
Thousands more customers were withdrawing their funds online, in what was certainly Britain's first virtual bank-run. By the end of the week, insiders reckoned up to £1 billion of Northern Rock's £24 billion in deposits had been sucked out.
For Adam Applegarth, Northern Rock's chief executive, once a City darling for his voracious market-grabbing strategy, the "world changed" on August 9. That was the day when French bank BNP Paribas, which had said it had "negligible" exposure to sub-prime mortgages just weeks earlier, suspended three of its investment funds.
It was, the bank said, simply unable to calculate how much they were worth.
The unprecedented announcement sent shockwaves around the financial world. Other institutions - including the mighty Goldman Sachs, the most aggressive bank on Wall Street - were forced to reveal that they were injecting billions of pounds of their own money to shore up some of their funds.
Applegarth became so desperate to secure the survival of his bank, which he joined as a graduate trainee 20 years ago, that his advisers touted it around the City, looking for a potential buyer.
As it became clear that no buyer would emerge to rescue Northern Rock, King, Darling and Callum McCarthy, the chairman of the Financial Services Authority, started to work on plans for the nuclear option - a bailout.
As Brown was genteely entertaining Lady Thatcher at 10 Downing Street, just around the corner in his old fiefdom, the Treasury, senior officials, in constant touch with their counterparts at the Bank of England and the City regulator, the Financial Services Authority, were grappling with the crisis.
King is allowed to ride to a bank's rescue only as "lender of last resort" - that is, if he believes allowing it to collapse will lead to serious economic damage. If Northern Rock went bust, the bank believed confidence in the entire financial system would be shattered. It was, as the saying goes, "too big to fail".
Last Thursday evening in the Bank of England, there was a whiff of the adrenaline-fuelled buzz that grips City banks when a big-money deal is in the offing. The bank's court, its arcane 18-member governing body, was forced to hold a hastily convened meeting at 9.30pm to rubber-stamp the decision to bail out Northern Rock.
Just a day earlier, King had released a toughly worded memo to the Treasury select committee, saying he had no intention of pouring cheap money into the financial markets. In a tone which one City analyst said reminded him of "matron", King said he wanted to avoid providing "ex post insurance for risky behaviour".
But even as he was warning the banks not to expect favours, King knew that frantic behind-the-scenes negotiations were already under way to rescue Northern Rock.
The Treasury and the Bank were at pains to stress they didn't consider their actions to be a "bailout". But not everyone is convinced by Applegarth's anaemic mea culpa that "I didn't see it [the credit crunch] coming. I don't know anyone who did."
Northern Rock was the most highly leveraged bank in Europe, according to Graham Turner, of GFC Economics. "It is not a victim of external events, but its own recklessness. They should have been forced into a firesale with a stronger institution, and the board sacked."
There were also murmurs of criticism of King's approach around the City last week, and rumours that Darling might have stepped in to persuade the Bank of England to soften its stance.
"Following the bail-out of Northern Rock, I can only conclude that the Bank of England is a paper tiger," the influential economist Willem Buiter, a former adviser to the Bank of England, wrote in his blog. "It talks the 'no bail-out' talk, but it does not walk the walk."
For now, with the Bank of England's cash behind it, Northern Rock is safe; but after its shares plunged by more than 30 per cent last Friday, and with its one solid source of funds, depositors' savings, fast disappearing, its long-term future looks uncertain. Many expect it to be swallowed up by a rival.
Somewhere in the offices of the US Federal Reserve lies an unfinished book, 120 pages long so far. It is a study of the Great Depression that ravaged America in the 1930s, written by the current chairman of the Federal Reserve, Ben Bernanke.
For economic historians, the Great Depression continues to fascinate.
They ask themselves one question: how could what initially threatened to be a moderate recession metamorphose into the biggest financial disaster in history?
Bernanke could have been forgiven for revisiting his work as he prepared to make one of the most important decisions of his life this week: whether to cut US interest rates. Making money cheaper will indeed lubricate the banking system and go some way to easing the credit crunch, but Bernanke will still be accused of bailing out greedy banks who played high-risk games and lost.
As King put it in a recent letter to the Treasury select committee, the problems in the US are "likely to have consequences for the wider global economy through the interest rates for borrowing and lending faced by households and companies".
There are political consequences too, falling house prices and economic gloom could hit Britain's Labour Party in the polls. Gordon Brown himself once liked to joke that there were only two kinds of Chancellors, those who failed, and those who got out in time.
After the events of last week, he seems to have made it by a whisker.
- The Observer
Haven't we been here before?
1929 crash
What happened? Shares on Wall Street fell 13 per cent on "Black Thursday", October 24, 1929, and kept falling until 90 per cent had been wiped off the value of shares in 1932. A big speculative rise in the Twenties based on new industries, such as car manufacturing and radio broadcasting, set off the crisis.
Who was hit? The whole world economy was affected and the US went into the Great Depression as a result.
1974 banking crisis
What happened? The availability of cheap credit and deregulation of financial institutions resulted in a property boom that was brought to an end by a quadrupling in the oil price, the miners' strike, the three-day week and tensions resulting from the Yom Kippur war.
Who was hit? Some smaller building societies were taken over.
1988-89 housing market
What happened? UK house prices soared, leading many owners to borrow money against the value of their home or to move to more expensive property. In order to cool the economy down, borrowing rates were raised to more than 14 per cent.
Who was hit? Many deferred on their mortgage repayments, lost their home or found themselves in "negative equity".
2000 dotcom crash
What happened? In the late Nineties, internet companies such as AOL or Amazon attracted the interest of stockmarkets because of their high profile, in spite of making little money. Their shares were overvalued and, eventually, the bubble burst in March 2000.
Who was hit? Business investment dropped and the US economy slowed down.
