Banks had already been finding it increasingly difficult to sell their pipelines full of "covenant-lite" leveraged loans: risk appetite was drying up fast. But now anybody lending money in the interbank market had to worry not only about the corporate loans that might be stuck on a bank's balance sheet, but also about potential black holes that might exist off the balance sheet, in hedge funds, special investment vehicles, or elsewhere.

One day, banks were the lubricants of the financial system, abetting the free movement of abundant liquidity. The next day, they were clogging it up: no one wanted to entrust their money to them.

If Ralph Cioffi's funds hadn't failed, would the credit crunch have been avoided? No. The event that precipitated the crunch was unforeseeable. But the crunch itself was not, as Riccardo Rebonato, global head of market risk at Royal Bank of Scotland, explains:

"Many observers have been saying for a while that the conditions of extreme liquidity (too much money chasing too few investment opportunities) of the last few years created the perfect environment for a ‘bubble' to form and to pop. Risk managers around the world have known very well for quite some time that these conditions of loose money were a financial disaster waiting to happen.

"Guessing precisely which disaster would materialize is, however, no easier than predicting from which of the many cracks in a dam the water will eventually burst out."

Once the "mortgage" crack burst, other cracks were bound to burst as well. Confidence in the financial system disappeared, which sent interbank interest rates soaring. Investors saw AAA-rated bonds plunging in value, which meant that the faith they had placed in the credit-rating agencies had been misplaced.

On the other hand, there were potential weaknesses that held up relatively well: non-financial high-grade corporate bonds still look pretty good (corporate treasurers turn out to have been a lot more risk-averse than Wall Street's finest), and the broader stock market is set to end 2007 in positive territory.

The hedge funds that lost a lot of money in August were invariably "market-neutral," which meant that the broader market was largely unaffected when they were forced to unwind their positions at a loss. And, of course, the Fed has shown itself unafraid to step in and cut rates in an attempt to provide liquidity, even if doing so means a weaker dollar and higher inflation.

Next year, as in every year, there will market surprises. There's a good chance that the worst is not yet over: if 2007 was the year of turmoil in the financial markets, then 2008 might well be the year that the real economy buckles.

But at least the risk of a recession is a known risk, and markets are positioning themselves accordingly. The panicked days of July and August, when traders had no idea what was going on or where the next multibillion-dollar loss might come from, did finally come to an end.

A few months later, when Citigroup discovered an $11 billion black hole sitting in an off-balance-sheet structure, the fall in markets was a rational reaction to bad news, rather than a panicked rush to safety. Many traders even managed to make money from all the volatility.

The second time around, bungee jumping can be fun.