Sure, the credit crisis has passed bottom, and the financial world is apparently on its way up, but don’t think that means the economy is past its worst.  Earlier this week, that man George Soros, once vilified for betting against sterling and the John Major government in 1992, and now something of a philanthropist, gave another of his nasty warnings for the economy.  And meanwhile, in the US, Paul Samuelson, a man who for the last four decades has sometimes been called the world’s greatest living economist, put his boot in too.

George is worried about how markets tend to go to such extremes – you know how it is, one moment everything is wonderful, the next everything is awful, and they never seem to find that happy middle ground.  “Never the twain shall meet,” as they say.

“The fact is,” Soros told the BBC, “markets are not tending towards equilibrium, ….if you leave markets to themselves they go to extremes and the authorities have to come in and bail you out.”

And that is the problem.  As markets overreact to the period of too much credit,  businesses with sound plans and solid projections may struggle to raise the money they need.  

“Once you’ve made terrible, overly optimistic errors, that paralyzes you for some time,” Samuelson told Bloomberg.

So, what about the recent return of optimism, the view things have hit bottom and are on their way up?  “I think we are past the acute phase of the credit crunch,” said Soros, “but it is the job of the authorities to provide liquidity, and it is quite remarkable how long it took them. But that is now largely behind us, but the fall out, the impact on the real economy, is yet to be felt.”

Then Soros turned his miserable science on the UK: “I think that unfortunately the situation for the UK is in many, (some) ways even worse than for the United States.”

George the doomsayer said the UK was suffering from house prices which were even more over-priced than in the US, even greater levels of personal debt and over-reliance on the City and financial services, which are of course suffering the most.

It is true that we appear to moving towards a second phase.    So far it has been the banks and financiers that have suffered.   Many business leaders have looked on with puzzlement: “Why all the doom?” they say, “Business is good.”

Now we are entering the next key phase; at least the US is, the UK still lags 12 months or so behind.   Frankly, right now it is not clear how bad, or indeed how mild, this second phase will be.    

In the post-credit crunch world, banks will be cautious, lending won’t be like it used to be. 

This morning, Bloomberg quoted Peter Hooper, chief US economist at Deutsche Bank Securities in New York and a former Federal Reserve official, as saying long-term growth in the US may drop to 2.5 or even 2 per cent from the 3 per cent we had become used to.

The real danger though is how banks value risk.

They made a massive mistake with the way they quantified property.    But property investment does nothing, or next to nothing, to promote real changes in an economy’s ability to generate wealth.  National wealth produced by rising house prices is an illusion.

Real wealth is enhanced by innovation; new ideas and products, new ways of doing things.   The danger has to be that in the backlash against the banks’ foolish lending, the victim will be innovation.

This is what governments should be turning their attention to.

We will leave you with the thoughts of a man who probably pulls rank not only over Soros and Samuelson, but every other economist who has ever lived –  Adam Smith, the man often known as the Father of Economics.    This is what he said:

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.”