Now into its third phase, that dastardly credit crisis simply refuses to go away. When the crisis first hit last August, I somewhat complacently dismissed it as just another temporary squall which would likely have an eventual cathartic effect by blowing off the excesses of the boom before they got completely out of hand.
Notwithstanding the liquidity problems which overcame Northern Rock, that still seemed the way to bet right up until November, when the crisis entered a new and more disturbing phase, eventually requiring coordinated central bank action to prevent the debt markets from freezing up entirely.
What began as a problem of rising arrears and defaults in US sub-prime mortgage lending had begun to spread, like a contagious disease, into all aspects of the securitised debt markets, causing values to fall and spreads to widen.
Yet massive infusions of liquidity and sharp cuts in interest rates have not been sufficient. In the past two weeks, conditions have again deteriorated sharply. The latest bout of nerves isn't yet quite as bad as the previous two, but the operative word is very much "yet".
Yesterday, the US Federal Reserve pre-empted this weekend's G10 meeting of central bankers in Basel, Switzerland, with the announcement of another massive package of liquidity. For how much longer can central bankers keep bailing out the markets in this way? The medicine has failed to work so far. Why should anyone believe it will work now?
Commercial banks have two distinct, but related, problems as they struggle to contain the crisis. One is lack of liquidity, making it progressively harder to finance themselves, the other is capital adequacy.
Dealing with the second of these problems first, banks are required for solvency purposes to maintain an excess of balance sheet assets over liabilities. If the value of these assets become impaired, then the bank may run into problems with its capital, depending on how much of a cushion it has maintained.
Banks with a high exposure to mortgage-backed securities, such as UBS, Merrill Lynch and Citigroup, have been in the front line of these capital problems. With modern accountancy rules, they are forced to write the securities down on a quarterly basis to their market value – so-called "mark-to-market" accounting – causing the capital cushion to become compressed. However, as the crisis in debt markets ripples into all aspects of credit, the problem is becoming more widespread.
British banks appear to have a relatively low exposure to collateralised debt obligations and other forms of "toxic" debt, but that hasn't stopped their shares being poleaxed in the markets as fears grow that other impairment charges might eventually force them to raise more capital.
All the British banks claim no immediate capital problems, in the sense that on paper they appear comfortably to meet minimum requirements. In the recent results season, they all went out of their way to stress there were no capital difficulties. To underline the point, they also all raised their dividends. Yet somehow, it failed to convince. Unfortunately for them, capital adequacy is in the eye of the beholder. By US standards, the margin for error among British banks is wafer thin. A sharp deterioration in bad debt experience might cause one or more of them to tip into difficulties.
What's more, they may in the round be more exposed to the continued liquidity squeeze than both their European and US counterparts, being both more dependent on wholesale funding and more highly geared. One way to ease a liquidity problem is to sell assets, yet plainly there is a problem in doing this when the markets are falling.
There is plenty of cash out there to invest among pension and sovereign wealth funds, yet no one will buy as long as they believe it might be possible to buy even cheaper tomorrow. When those with money sense distress, they bide their time, waiting for the bargain-basement prices of forced liquidation.
None the less, banks with a strong capital position find it relatively easy to solve any looming liquidity problem either by raising finance expensively or selling assets, if necessary at a loss. The strength of their balance sheets allows them to absorb the hit. Conversely, those with a weak capital position are more constrained in selling assets. A weak capital position will also adversely affect the markets' willingness to lend, compounding the problem with liquidity.
This, in a nutshell, is the bind that many banks now find themselves in. They all have lots of valuable assets, but with the credit markets as dysfunctional as they are none that can readily be turned into cash. If there were easy answers, other than the provision of regular injections of liquidity by central bankers, they would already have been tried.
As long as the unwanted CDOs and other asset-backed securities remain on the bankers' balance sheets, there is a lack of trust in their creditworthiness and the inter-bank lending markets therefore remain largely closed. Yet few banks would dare risk a fire sale for fear of the value collapsing to zero and destroying their capital adequacy. Organised schemes to clear the decks are therefore proving exceptionally difficult to facilitate.
As I say, a liquidity problem can normally be dealt with by selling assets. Yet if everyone has the same problem at the same time, then assets cannot easily be turned into liquidity.
Having seen the unimaginable now take place, when virtually all credit assets have been affected simultaneously, severely and for a prolonged period of time, both bankers and regulators are in future going to be much more cautious. This is likely to have a very significant effect on the role banks play in the wider economy.
The function of a bank is to take short-term savings and convert them into longer-term loans. Their role is that of intermediary between those who have surplus cash and those who don't but reckon they can put the money to profitable, or as events have turned out, profligate, use.
The tougher the liquidity requirements become, the less the banks can do of this maturity conversion. A harsher liquidity regime forces banks into having more of their money on shorter durations.
The bottom line is that while the most creditworthy will continue to find it easy to get money on reasonable terms, or possibly even easier as everyone chases the same low-risk business, credit will very definitely become scarcer and more expensive further out along the curve. Much of the high-risk, speculative lending which has been funding exuberant economic growth will disappear.
In the long term, this might be thought of as a positive development. Certainly it appeals to those of a puritanical streak who have long believed that Anglo-Saxons are spending well beyond their means. Yet getting from here to there is a road fraught with difficulties. As the Western world comes down from its debt-fuelled high, the innocent stand to be punished alongside the guilty.
The US recession which I considered last August to be still a couple of years away, may already be upon us. The Fed would have waited until after the Basel meeting to launch its new liquidity measures – when there would have been a good chance of doing it coincidentally with other central bankers – but for yesterday's US jobs figures, which were grim. Without the Fed's actions, the markets would have taken an even worse beating than they did.
Will it work? It hasn't so far. Until bankers convincingly clear the bad debt problem, continued injections of liquidity cannot be anything more than pain relief. Most sustained crises require a cataclysmic event to bring them to a conclusion. Northern Rock, it turns out, wasn't such an event, all absorbing though it has been. As the credit crisis moves towards its denouement, let's hope the Rock wasn't just the hors d'oeuvre.