´óÏó´«Ã½

I've spent the past few days here in Sarajevo, talking to Bosnian radio broadcasters about how they do their job and how I do mine.

You probably remember reading about Sarajevo: for three long years in the early 1990s, it was pretty much constantly in the headlines. Bosnia was engulfed in a vicious civil war, part of the deadly conflagration that followed the disintegration of Yugoslavia. For most of that time, Sarajevo was under siege, bombarded by artillery and mortar shells fired by Serb gunners in the hills that surround the city.

These days, many of Sarajevo's physical scars have healed. In the 12 years since I was last here, in the aftermath of the war, the churches and mosques have been rebuilt, and the red tiled roofs on the private houses have all been repaired. Now, new steel and glass office blocks line the road from the airport and give parts of this most charming of ancient European capitals the look almost of a Kuwait or a Dubai.

But I don't want to give you the impression that this is now a normal, functioning state. Bosnia is still a nation divided, both emotionally and politically. The Bosnian Muslims (or Bosniaks as they are now known) are in a sort-of partnership with the Bosnian Croats, in what they call the Federation of Bosnia and Herzegovina. The Bosnian Serbs have their own "entity", the Republika Srpska, which is in theory part of the Republic of Bosnia and Herzegovina, but which to all intents and purposes runs its own affairs.

So if you were confused during the Bosnian war, I'm afraid you'd still be confused now. "This is a very strange place," said one man I met. "The Bosnian Croats want to be part of Croatia; the Bosnian Serbs want to be part of Serbia. Only the Bosniaks are happy to be Bosnian." It's not exactly a recipe for the building of a successful nation.

But it doesn't need an enormous leap of the imagination to see Sarajevo as a flourishing European tourist destination, a Balkan answer to Prague or Vienna. It has a unique charm, built partly on the ancient wooden structures in the old town, and partly on its location, surrounded by high wooded mountains every bit as scenic as the Austrian Tyrol. (Tourists of a historic bent can of course stand on the very spot where Archduke Ferdinand was shot in June 1914, which became the spark that ignited the First World War.)

Sarajevo hosted the 1984 Winter Olympics, and up in the mountains there are ski runs and hotels galore, ready and waiting to be used. In the city itself, there is a national museum, an ancient synagogue and one of the world's most priceless historic Jewish manuscripts. There are mosques, Serbian Orthodox churches and history at every street corner.

The only thing wrong here is the politics. Paddy Ashdown, who was the international community's most senior representative in Bosnia between 2002 and 2006, the other day, together with the former US diplomat Richard Holbrooke, who was one of the main architects of the peace agreement which ended the Bosnian war in 1995: "It's time to pay attention to Bosnia again, if we don't want things to get very nasty quickly. By now, we should all know the price of that."

Indeed, we should. Maybe the European Union and the new US president should add Bosnia to the "to do" list.

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• - What's this?

So, what's it to be? Would you rather I wrote about George Osborne and the £50,000 he didn't ask for from the richest Russian on the planet - or the gazillions of pounds, dollars, and euros that the bankers did ask for, and got?

Frankly, I think we can leave Mr Osborne alone. He'll live to fight another day, I'm sure, a bit bruised maybe, but having at least learned a valuable lesson: that it's not very clever to spin against a spin-meister and expect to emerge unscathed.

As for the bankers, why is it, I ask myself, that having dug deep into my pocket to lend them the £37 billion they apparently needed, I now hear the Prime Minister and the governor of the Bank of England warning that we're about to plunge into a nasty economic recession anyway?

After all, we're being told that - although you may not have noticed it yet - the banks are beginning to get back into the lending business again. And that's good news, because banks that don't lend aren't doing what banks are designed for: looking after our money and using it to oil the wheels of commerce.

But don't blame me if they're not ready just yet to lend any to you, or if the terms they're offering make your eyes water. Bankers scare easily, it seems, and they've just had a very nasty fright. So they're still being very, very careful before they emerge from beneath the blankets.

Which leaves the question I started with: why the recession? Well, remember how you borrowed that extra £50,000 when you realised your home was worth twice what you paid for it? Remember how you used the cash to buy a bigger car, a humungous plasma screen TV, and installed a tasteful water feature in your redesigned back garden?

Now ask yourself this: are you ready to do it all again? What's your home worth now, by the way? So maybe there'll be no new car next year, no new electronic toys, and no more juicy contracts for the local builder/garden-designer/loft extender. Multiply that by the sum of your neighbours, and hey presto, there's your recession.

And if, because you've all stopped spending, your local builder runs into cash-flow problems, his friendly bank manager may not be as friendly as he was last time. That essential loan to keep the business afloat for the next few months may not be forthcoming. The business may go bust. His 15 or 20 employees will be looking for jobs. They won't be spending much, that's for sure. And so it goes on.

But as you know, I like to look for silver linings where I can. Oil prices have plummeted - which means that you can probably fill up your car now for less than a pound per litre of unleaded. And the haulage companies that deliver the food to your local supermarket can breathe a bit easier as well. Which means food prices may stop rising.

And the pound is slipping against the dollar - which is good news for British exporters who've been having a rotten time over the last several months (although admittedly it's less good news if you were planning to do your Christmas shopping in New York this year.)

Oh, and inflation is unlikely to be much of a problem now, which is good news for those on fixed incomes (like pensions, for example). Yes, the stock market is a mess, which makes your pension fund a bit unhappy - but I think we have to assume that at some point the sellers will become buyers again, and share prices will resume their upward progression.

You're going to be reading a lot about the recession over the coming days, but take my advice: don't let it get you down too much. Yes, it'll be tough - especially, of course, for those who lose their jobs or their businesses. And yes, there may still be some nasty surprises waiting to jump out of some banker's woodwork.

But if we keep our heads - and if governments and bankers keep theirs - I reckon we'll be able to see it through. Mind you, I don't think I'd want to be a Porsche dealer in Canary Wharf at the moment ...

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• - What's this?

The US presidential election campaign enters its final two weeks today, and if you're not interested now, I guess you never will be. So this is the last of the Lustig election survival updates, designed for those of you who have neither the time nor the inclination to wade through the acres of coverage.

My next dispatch will be on the day after the election, 5 November, when I'll be in Washington to report on the outcome for both The World Tonight and the World Service. But for now, here are the five things you need to know.

1. Barack Obama is the clear favourite to win. But the opinion polls do not give him an overwhelming lead, and it could be tight.

2. The states to watch out for on election night are Florida, Ohio and Virginia. If John McCain doesn't win all of them, he's almost certainly lost. (Currently, Virginia is listed as "leaning to Obama"; the other two are "toss-ups".)

3. Obama has raised $600 million to fund his campaign - he'll soon have raised more than George Bush and John Kerry combined in 2004. A third of it has come in donations of less than $200.

4. Obama did well in the TV debates, but it's doubtful they made much difference. Ditto the endorsement of President Bush's former secretary of state Colin Powell.

5. If Obama does win, it'll be because (i) he ran a superb, focused and disciplined campaign; and (ii) the Republicans are being blamed for the economic crisis.

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I don't know about you, but now that it seems global capitalism isn't about to come crashing down around our ears after all, I reckon it might be time to try to catch up with what else is happening out there in the big wide world, beyond the hysteria of the money markets. (I'm not suggesting the financial stuff doesn't matter, simply that perhaps other things matter too.)

Afghanistan, for example. There's a war going on in Afghanistan, as you may remember. A coalition of NATO-led troops are trying to "defeat the Taliban" (we'll come back to that in a moment): many lives are being lost, both civilian and military. There are now more US and UK lives being lost in Afghanistan than in Iraq.

So maybe it's time to take a long hard look at what's going on. And that's just what we're going to do in tonight's (Friday's) programme. (If you've missed it by the time you read this, it's available for the next seven days via Listen Again on the website.) It's also, not entirely coincidentally, what the US administration is now doing, to try to redefine strategy for the coming months.

According to a report last week in the , US intelligence officials are warning of a rapidly worsening situation in Afghanistan, where they say reconstituted elements of al-Qaeda and the resurgent Taliban are now collaborating with an expanding network of militant groups.

What's more, according to reports in the French press, a from a senior French diplomat in London quotes the British ambassador in Afghanistan, Sir Sherard Cowper-Coles, as saying that the international military presence there "is part of the problem, not the solution."

And the outgoing British military commander, Brigadier Mark Carleton-Smith, told 10 days ago that a military victory against the Taliban is "neither feasible nor supportable".

So what it all adds up is that the entire NATO-led operation in Afghanistan is in big trouble. It began as a way of defeating the people held responsible for the attacks of September 11, 2001, and at first it did what it was meant to do: overthrew the Taliban, forced al-Qaeda into hiding, and installed a pro-Western government in Kabul.

But is all that now at risk of being reversed? If the Taliban are getting stronger again, might it be an idea to try to engage with at least some of them to see if there's a way of encouraging them into a political, rather than a military, process?

And don't forget, just across the border in Pakistan, there's another war going on, as the Pakistani army tries to establish control in areas which have traditionally been left to local tribal leaders to look after. Trouble is, some of those leaders are sympathetic to, and offer hospitality to, Pakistani Taliban fighters who are both a threat to the government in Islamabad and only too happy to make common cause with their fellow Taliban in Afghanistan. (There are now more Pakistani troops fighting in the region bordering Afghanistan than there are US troops in Iraq.)

Complicated? You bet. But as the British discovered in Afghanistan in the 19th century, and as the Soviet army discovered in the 1980s, foreign armies tend not to win wars there. That's why the fundamental policy review now under way in Washington is so important - and why I hope you'll be able to listen to tonight's programme and add your comments.

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• - What's this?

I think you need to understand credit default swaps, and why they matter. in The Observer spells out in words even I can understand what lies at "the dark heart of the global financial system" ...

... in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments. This is a market more than twice the size of the combined GDP of the US, Japan and the EU ...

This market in credit derivatives has grown explosively over the last decade largely in response to the $10 trillion market in securitised assets - the packaging up of income from a huge variety of sources (office rents, port charges, mortgage payments, sport stadiums) and its subsequent sale as a 'security' to be traded between banks.

Plainly, these securities are risky, so the markets invented a system of insurance. A buyer of a securitised bond can purchase what is in effect an insurance contract that will protect him or her against default - a credit default swap (CDS). But unlike the comprehensive insurance contract on your car which you have with one insurance company, these credit default contracts can be freely bought and sold ...

Their purpose was a market solution to make securitisation less risky; in fact, they make it more risky, as we are now witnessing. The collapse of Lehman Brothers - the refusal to bail it out has had cataclysmic consequences - means that it can no longer honour $110bn of bonds, nor $440bn of CDSs it had written. On Friday, the dud contracts were auctioned, with buyers paying a paltry eight cents for every dollar. Put another way, there is now a $414bn hole which somebody holding these contracts has to honour. And if your head is spinning now, add the three bust Icelandic banks. They can no longer honour more than $50bn of bonds, nor a mind-boggling $200bn of CDSs.

The implications are global. The UK government might have frozen Icelandic assets in Britain to get some compensation for the losses, but we are only part of the story. Austrian, Danish and Finnish banks all hold near valueless Icelandic bonds on which they will have bought CDSs from heaven knows whom - Deutsche Bank? A two-bit hedge fund in Dubai? Lehman Brothers? Kaupthing? Shareholders in Barclays and RBS are rightly concerned; the two banks hold a stunning $2.4 trillion of CDSs each - more than the UK's GDP.

We don't know their exposure to Iceland and Lehman Brothers, but with such enormous credit derivative books it would be amazing if there were none. While every bank tries to pass the toxic parcel on to somebody else, the system has to find the money. So will compensation for the near valueless contracts and thus now uninsured debt ultimately be made - and by whom? And because nobody knows - not the regulators, banks or governments - who owns the swaps and whether they are credit-worthy, nobody can answer the question. Maybe holders of insurance policies will get the cash due to them, but will that weaken somebody else? The result - panic.

And here's his conclusion:

For 30 years, greedy, callow, ignorant financiers, supported by no less callow politicians from all the political parties, have proclaimed the wonders of financial innovation and how proud we all should be of the City of London. The price tag for their behaviour is an economic calamity. We should never have bought such snake oil. The consolation in these dark times is that we never will again.

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• - What's this?

Have you noticed how all the world's most learned economists so accurately predicted the current financial melt-down? How they warned that Iceland was about to teeter on the edge of insolvency? That after the US Congress passed the bank bail-out plan last Friday, share prices in New York and London would plunge on Monday?

You haven't? No, nor have I. That's because the study of economics is no use at all in the current climate. What you need is idionomics. Don't worry, I'm an expert.

The starting point in the study of idionomics is a simple principle: No one understands anything. From this it follows that any pundit pretending to understand isn't worth listening to. (I naturally exempt all ´óÏó´«Ã½ colleagues, who seem uniquely able to explain what is happening, even if, like everyone else, they find it more difficult to predict what will happen an hour from now.)

Which brings us to the second fundamental principle of idionomics: Never predict the future; always confine yourself to explaining the past. (Many economists observe this principle even without acknowledging their debt to idionomics.)

The third principle combines two, apparently contradictory maxims: however bad it is today, it may well be worse tomorrow - but never assume that because it's bad today, it will be worse tomorrow. This is sometimes called the "random unpredictability factor", and only very rich people fully understand it.

By the way, if you ever make it through to advanced idionomics, you will find yourself grappling with the difficult concept of "rich does not equal clever". This can be summarised (and simplified) by stating that very rich people should not be regarded as very clever. They are simply very rich.

I risked the scorn of my peers the other day by writing here: "I hope I'm not being a total simpleton if I suggest that some of the coverage of recent events risks losing a sense of proportion." And well, well, if I didn't read in the today:

"The magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s."

The author was , who won the 1992 Nobel prize for economics. And he's clearly studied idionomics as well, because he also writes: "The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types of stress."

Which is an uncannily accurate paraphrase of the first principle of idionomics: No one understands anything.

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• - What's this?

Thanks to the for pointing out that if John McCain is elected next month, he'll be, at just 5'7" tall, the shortest US President since William McKinley, who was elected in 1900.

Every President since Dwight Eisenhower (5'10½") has been six feet or over. (Well, to be strictly accurate, Richard Nixon was 5'11½" but who's measuring?)

Barack Obama is 6'1½".

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• - What's this?

Funny, isn't it, how the most complex political choices can sometimes be reduced to two simple words: experience, or judgment?

In the US, Barack Obama says his judgment is a better bet than John McCain's experience. And here in the UK, the Conservative leader David Cameron says the same about the choice British voters will face between him and Gordon Brown.

But why is it, do you think, that if the opinion polls are right, financial melt-down is good for Mr Brown's ratings - presumably because voters think they'd rather stick with what they've got in times of crisis - but also good for Mr Obama, who seems to be benefitting from US voters' conclusion that it's time they kicked the current bunch out?

In the UK, we seem to rally round the incumbent; in the US, they seem to do the opposite. Ah, the endless fascination of politics!

I stayed up late again to watch the vice-presidential debate. The Palin/Biden choice is not so much judgment against experience, but rather two-years-as-governor experience against 36-years-as-senator experience.

And there's no rule in American politics that says Senatorial experience is necessarily better than Gubernatorial experience. After all ex-Governor Jimmy Carter, ex-Governor Ronald Reagan, ex-Governor Bill Clinton and ex-Governor George W Bush all made it to the White House.

And it's worth remembering amid all the scorn poured on the governor of a remote state like Alaska that neither the peanut farmer from Georgia (Carter) nor the red-neck from Arkansas (Clinton) were exactly well-versed in international affairs when they first took office.

Having said which, how did the young Governor do against the not-so-young Senator? Did she screw up? No, she did not. Did she embarrass the Republican ticket? Again, no. Did she manage to claw back some of the credibility she lost over the past week or so? (One poll suggested that more than half of America's voters regarded her as unfit to be President.) Yes, I think she did.

Governor Palin was folksy, smiley and, mostly, self-assured. Senator Biden was controlled, not always so good at connecting with the audience, but managed not to come across as patronising or bullying.

He concentrated on attacking John McCain rather than Sarah Palin - and he returned to the attack again and again. And about 20 minutes from the end, there was real emotion when he spoke of the difficulties his own family has been through: for a moment, it looked as if he was about to choke up.

On substance, I reckon Senator Biden was the clear winner. No real surprise there. But if Governor Palin's task was to look credible and to defend John McCain, well, she succeeded. But the opinion polls all seem to be going Barack Obama's way at the moment, and tonight the House of Representatives votes on the bank rescue plan.

So although I'm glad I stayed up to watch the debate, my guess is that by Monday, it'll be forgotten. Because on Tuesday, there's the second of the Obama-McCain encounters. I'll be watching.

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• - What's this?

I simply don't know what to say about this: the bookmakers are offering odds on which city will be the first to experience riots due to the current financial crisis.

Paris is the current favourite, at 3-1.

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• - What's this?