The financial crisis – the vital questions answered

Why are the markets tanking?

The root cause is the condition of the world's financial system, and the health of the banks. The banks are unwilling to lend to each other for even a day, and are increasingly wary of lending to the wider economy. Without credit, the economy will stumble, healthy companies will go bankrupt, unemployment will soar and house repossessions and homelessness will rise.

What's needed now?

Action not words. The banks need money, and governments will have to provide it by taking stakes in them.

What are the authorities doing?

The G7 and the IMF again promise more global co-operation but the banks need what's called "an injection of capital" – the financial backing they need to go about their business. The quickest way to raise the funds is to for governments buy shares in them.

What could go wrong?

Every piece of government intervention so far has seen, at best, only a temporary recovery. The danger now is that any action taken, such as even deeper cuts in interest rates, will also have a minimal effect.

What are the prospects?

The problems in the banking system have a direct impact on families' ability to buy homes and consumer goods, on farms, factories and offices buying equipment. At worst, share prices could fall by 50 per cent from their peaks last year and house prices by another 20 per cent. Such a devastation of wealth makes us less liable to go out and spend, dragging economies down further.

What else can go bust?

Countries. Sovereign states, such as Iceland and some emerging economies, could default on their debts, causing more instability. Big companies too; the likes of General Motors has seen its shares crash byalmost 50 per cent in a few days.

What could the endgame be?

If all else fails, governments will have to nationalise their banking systems, but only if they and their currencies are strong enough. We've seen runs on some of the word's biggest banks and insurers and some smaller economies; could a run on the US itself, and a complete collapse of the dollar be ruled out?