Resident Fellow  Desmond Lachman

Sir, Your editorial "More haste, and much more speed" (October 11) correctly underlines the urgent need for a co-ordinated Group of Seven approach to resolving the global banking crisis. However, now that the global financial market crisis has spread to the hedge funds, one has to wonder whether co-ordinated G7 policy action should not go well beyond recapitalising the banks if a severe and prolonged global recession is to be avoided.

In the US, banks now account for less than 30 per cent of overall financial intermediation, while hedge funds, structured investment vehicles and private equity funds in aggregate have balance sheets of a similar size to those of the banks. As Gillian Tett so well reports, the run now under way on these non-bank financial institutions is forcing them to deleverage their balance sheets aggressively in much the same way as the banks have been doing.

Even if a quick solution were to be found for the banks' capital inadequacy problem, it is unlikely that the hedge funds' deleveraging process would be arrested, since these funds will continue to experience large redemptions due to poor performance in a declining market. It would also appear that stabilising the non-bank financial institutions goes beyond the remit of the G7 central banks.

The sharp contraction of overall global credit creation that is now occurring as a result of bank and non-bank deleveraging would support the argument for a co-ordinated G7 fiscal stimulus package together with further aggressive monetary policy easing to support global aggregate demand. This would appear to be especially the case when one considers the large hit to US consumer demand from falling home, equity and bond prices, which have wiped out more than 80 percentage points of gross domestic product in US household wealth over the past year.

Desmond Lachman is a resident fellow at AEI.