So, what happens next?

Well, like I said, blogging about seeing value in some areas of the equity markets last Friday "would have made me look fierce cute for a few hours." Markets go up a record breaking amount Monday - and back down nearly the same amount Wednesday. And the US markets give investors whiplash Thursday (way down, then way, way up in the last hour.)

I'm not going to bother talking about these immense shifts, because they are largely noise, not signal. They're the meaningless volatility you get around around major economic transition points. A huge one-day leap does not mean everything is going to be OK, and a huge drop does not necessarily mean it's the end of the world.

The Plain People of the Internet: What transition?

Well, the crisis is finally transferring from the financial economy to the real economy.

The Plain People of the Internet: What will that mean?

Some class of a recession. Less credit means less borrowing, less investing, less money, less jobs. We will save more, and spend less, because we will have to. Which will be good for us in the long term, but bloody painful in the short term. No chocolate on our biscuits for a while. And for a lot of people, no biscuits at all.

The Plain People of the Internet: Will the real economy collapse as much as the ghostly financial economy has?

Jesus, I hope not. The shadow banking system (which grew up outside the regulated banking system over the past decade), has been completely destroyed. The real economy will not be completely destroyed.

Within the financial sector, entire business models, an entire worldview, and an associated set of incredibly stupid but almost universally believed economic theories, have been annihilated. Basically, the financial sector has lost its money, its job, its house and its religion. The real economy will do much better than that. It might get quite a nasty kicking, but I am strangely optimistic about the real economy in the medium term, say the next few years. (Short term, sure, it's going to be horrible.)

The Plain People of the Internet: Will the markets fall further?

Yes. At least 20% and almost certainly much more.

The Plain People of the Internet: Will house prices fall much further?

Yes. US house prices will fall at least another 15%, and almost certainly much more, unless there is a massive government intervention in the mortgage market (on top of its recent interventions in the financial markets). The next US president will be inheriting a foreclosure catastrophe. Millions are set to lose their homes, so some major further initiatives are likely. This is a very dynamic situation, and it's hard to predict how it will turn out. The nature of the way in which mortgages were sliced, diced, packaged and sold on makes the problem very difficult to solve.

Oh, and Irish house prices will have their arse kicked much harder than that. There will be parts of the country where you'll be picking up houses for a few grand in another couple of years. I've seen ghost estates, built on spec in ridiculous places all over Ireland, that noone will ever live in.

The Plain People of the Internet: Is it the end of the world?

No. It's just going to be the big, bad recession the West should have had after the dot-com crash, but put off for years - and made much worse - with low, low interest rates and loose, loose money. (OK, if I wanted to be fair and balanced I'd mention a bunch of fascinating technical stuff about how the Chinese government stopped the country's dollar income reaching the workers, and diverted it straight back to the US instead... but that stuff gives people a headache, and needs a post of its own.)

Bear in mind, a country cannot get rich through its people selling houses to each other at ever higher prices. The ongoing collapse in house prices makes people with huge mortgages worse off. But it makes a heck of a lot of people without houses better off. Rents will go down, first-time buyers won't have to sell a kidney and bankrupt their parents to buy a dodgy flat, etc.

In fact, people, on average, are happier in a recession (as long as they don't lose their job or their house). There's a lot less status anxiety, and people appreciate what they have, rather than wishing for what they have not. And pop music always improves in recessions. So it's going to be great!