Meanwhile the rest of us are left to wonder quite why the global panic indicators have clicked up quite so suddenly. Nothing has really changed since July, when Wall Street hit its highest level ever. And if it were so easy to restore confidence by having a co-ordinated cut in global interest rates, why don't they just get on and do it?
When you look at the substance of what is being proposed, as opposed to the stuffy language which is wrapped around it, there is not that much that is likely to be effective. Or at least not easily and simply effective.
There are really only two weapons in the armoury. One is multi-purpose, powerful, ready for immediate use: a concerted interest rate cut. But it is also a single-shot, as repeated use would render it ineffective; and it cannot be targeted, so it hits places that do not need to be hit and causes collateral damage. The other weapon is weaker, more complex, slower to assemble and subject to failure: finding the right mix of financial support and policy reforms for each country, company or bank that has got itself into trouble. The first weapon, cuts in rates, can buy a bit of time, but the second weapons are the ones that really matter.
First, though, can we really be facing the most serious economic challenge for 50 years? No, of course we aren't. American presidents under stress are known to ham things up a bit. It was President Nixon who described the Smithsonian Agreement in 1971, which shored up the fixed exchange rate system, as "the greatest monetary agreement in the history of mankind". It lasted about six months.
Nor should we listen too closely to George Soros. He has made a lot of money and has a good nose for markets. He correctly saw that sterling would have to come out of the Exchange Rate Mechanism in 1992, and helped it on the way. But he makes mistakes and has recently completely mis- called investment in Russia.He has now lost a lot of money and when people lose money they tend to find it easier to blame the system than blame themselves.
The dangers are, however, quite considerable, for it looks as though the world is heading into another downswing comparable to that which followed the first and second oil shocks in 1973/4 and 1979, and the 1988-89 boom. Not every country will, however, be equally affected. They never are, for just as each boom is slightly different, so too is each downswing. In some countries there will be outright recession - there already is in much of east Asia, including Japan, and in Russia. In others, maybe including ourselves, it is possible that there will be merely a sharp slow-down in growth, but with the economy managing to inch forward.
In truth, we don't know. The opinions of the experts are often rubbish. Back in July, when the US market peaked, there were plenty of immensely highly-paid American investment advisers saying that the market was soundly based and was likely to rise further. Clever people get things wrong.
What we do know is that a global downturn of uncertain dimensions seems more likely by the day. Accordingly, as the dangers mount, it is right to work out what firepower we have against recession and to get the weapons ready.
Start with interest rate cuts. Why not just do it?
Three reasons. One: a cut in rates may be right for the world as a whole but wrong for several of the countries that have to do the cutting. If you look at the US or the UK today, the domestic case for a cut remains marginal. Both countries have probably been wrong not to raise rates more over the previous two years. If they had, they might have chipped a bit off the top of the present boom and so lessened the danger of the future slump.
Two: if the cut is not credible, it won't work, so it has to be backed- up by policies of the second type noted above. The cut buys time, which is great. But it only buys time.
Three: you can only do this sort of thing when you are very sure that it is right. Co-ordinated interest rate cuts in 1987, after the stock market crash, actually made the subsequent boom and bust worse.
I still think there probably is a case for cuts in interest rates as part of a wider set of measures. Talk about this has helped shore up markets around the world in the last few days. But what will matter is the long, slow, cold slog of fixing each problem of the world economy in a way that will not be perfect, but will be good enough.
This means putting in a mixture of loans and policy programmes in countries that have made a mess of their policies.It means countries that have weak financial systems using taxpayers' money to shore them up. Each decision - do you lend money and on what terms, or do you let whatever it is go bust? - has to be taken on its merits. And some decisions will inevitably be wrong.
Patching the system also means trying to find ways of giving more resources to the two organisations that have most experience in fixing global economic problems: the International Monetary Fund and the World Bank. Their joint annual meetings start in Washington at the beginning of next month and something ought to be in place by then.
The Fund and the Bank have attracted a lot of flak over the last year for supposedly inappropriate policies. They probably have made mistakes. They remain, nevertheless, the best mechanisms we have to anchor the world economy. My worry is less that they make mistakes, but rather that they are too small, too weak and too unpersuasive to be able to push much-needed policy changes by sub-optimal governments.
Finally, anyone who follows global economic affairs is going to be blasted by a string of suggestions, position papers and demands for radical change in the world money system. These ideas are always bubbling away, but when things seem fine, no one pays much attention. When they are not, everyone scurries about calling for this, that or the other. It is boring, and the ideas are mostly silly, but that is what is going to happen.
There are, however, some ideas that have real merit. One, floated last week by the French Finance Minister, is to look at the idea of having bands between the major currencies, within which the authorities would try to hold their currencies. If the bands are too rigid, they merely create barriers to be broken and opportunities for people like George Soros to make speculative gains. The only people worse at fixing exchange rates than the markets are politicians. But the foreign exchanges do undoubtedly overshoot and if some way could be found to level the peaks and troughs, it would reduce, a bit, one source of instability in the world economy.
That, however, is for the future. For the present, it would be nice to pretend that there is a quick fix. There is not. Fortunately there is no need for a global catastrophe either.Reuse content