Jeremy Warner's Outlook: Markets threaten meltdown, but this is primarily an issue of confidence

A colleague with a longer recollection of financial crises than mine says that, when he first came into financial journalism, there used to be something known as "the 40-year rule".

This had it that really serious banking crises only happened once every 40 years, because that was roughly the career lifespan of most bankers – in at 20, out at 60. It therefore required a full 40 years to wipe out all institutional or salutary knowledge of the previous calamity, thereby creating the next one.

When you think about it, in rough terms the rule actually works. The last big banking crisis was in the early to mid-1970s. Prior to that, you have to go back to the Great Depression. Further back in history, there was another really bad one in the late 19th century, and so on.

Certainly the current crisis is outside most people's experience. Few of those who work in the City and on Wall Street even properly remember the downturn of the early 1990s, let alone the banking crisis of the 1970s. George Soros, the billionaire speculator and philanthropist, has described it as the worst financial firestorm since the Great Depression, and we've every reason to believe him.

Yet that doesn't mean it is necessarily going to end in an equal economic implosion. After another shocking day in stock markets yesterday, partially reversed on Wall Street later on as a result of a sudden fall in the oil price, Kevin Gardiner, equity strategist at HSBC, observed that there is no point in arguing with the market in this mood.

Despite corporate and economic fundamentals that are actually not that bad, if confidence in the financial system continues to erode at the present stomach-churning rate it will eventually bring the economy with it. Markets are in danger of creating a self-fulfilling prophecy. So far, the policy action taken in the US and elsewhere has failed to underpin confidence in our financial institutions in the manner intended. Rumour, fear and hearsay continue to rule the roost. For central bankers, it has been like spitting against the wind.

There are two ways it can go. Either things will settle after a short and relatively mild downturn, and we'll eventually look back at what's occurred as just another of those temporary, and in some respects necessary, workouts that must always follow a period of excess. Or it will turn into one of the really bad 40-year events with potentially catastrophic economic and political consequences lasting many years.

To believe the latter, you have to think of the global liquidity boom of the past 10 to 15 years as some kind of giant aberration, an unsustainable fool's paradise, or Ponzi-style merry-go-round, in which the Chinese and oil- producing nations of the Middle East bought duff debt from the Americans in exchange for the Americans buying duff products and hydrocarbons from them.

There may be some underlying truth in this assessment. It has been a strange upside-down sort of world in which some of the poorest countries have in effect been financing the consumption of some of the richest, but it is also very probably mistaken. Too many people have a vested interest in economic progress and development now to let it fail.

Obviously, this is a bad and scary banking crisis, made infinitely worse by the effect on consumption and economic growth of a soaring oil price, but, providing regulators and policymakers can get on top of it, it doesn't have to end in calamity. The stock market seems to be approaching some kind of dénouement. What happens in the next few weeks might be critical.

One thing seems clear. The rumour-mongering has to stop. Christopher Cox, the chairman of the Securities and Exchange Commission, is absolutely right to announce a crackdown on short- selling of bank stocks and the spreading of false information. For the sake of a big fat profit, the speculators threaten to bring the West's financial system to its knees. If it tips over, it won't be them that suffer. Economic pain is always felt most acutely by the poorest.

BT promises investment in fast broadband

Fast-back 12 years to the Labour Party annual conference just before Tony Blair was swept to power in a landslide election victory. In a blaze of publicity, the prime minister-in-waiting announced he had agreed with BT's then chairman, Sir Iain Vallance, that, in return for regulatory concessions, BT would invest £10bn in a spanking new fibre-optic network that would put Britain at the cutting edge of the new information technologies.

The pact never came to anything. Once in power, Mr Blair soon found that the constraints of government meant he couldn't deliver BT the rebirth of monopoly it sought. Soon after, BT became one of the worst hit in the windfall profits tax the new Labour government whacked on the utilities to finance its social policies, leaving Sir Iain to vow he would never vote Labour again.

Disillusioned with the UK, he then went off on a hare-brained international shopping spree that he promised would deliver the returns the UK had refused him. It ended up very nearly sinking the company.

The broad outline of the debate doesn't seem to have altered very much in the intervening period. The Government is still trying to persuade BT and others to invest in superfast broadband, and BT is still saying that it needs regulatory concessions if it is to do so.

We perhaps shouldn't therefore read too much into yesterday's promise from BT to invest £1.5bn over the next five years in fibre optic networks. Only £100m of this spending is committed. Much of the rest merely duplicates investment that would have to be made anyway, and the balance is dependent on regulatory concessions, some of which will be opposed by rivals.

For instance, the present obligation to maintain copper networks alongside the new fibre ones might seem like an anachronism, but copper is in fact the medium through which competition is delivered. Other suggested concessions are likely to prove equally contentious. Virgin Media, the UK cable operator, would resist attempts to provide equality of access on the same terms as BT.

Likewise, rivals will fiercely oppose interference in the current wholesale pricing regime. BT insists it won't go ahead with the investment in broadband unless there is the opportunity to earn a decent rate of return. Wholesale rates on some products, BT contends, are below the cost of capital.

For the time being, demand for 50 megabyte bandwidth is limited, but that's because it is largely unavailable. A bit like roads, once built, it will soon create its own demand, and eventually all our home entertainment and communications will be beamed into the house via these links.

Broadband is cheaper and has a better take-up in the UK than almost anywhere else in the G7, but we are falling behind on investment in superfast networks. Both Ofcom, the industry regulator, and the Department for Enterprise, Business and Regulatory Reform are conducting separate investigations into how we might raise our game.

Ian Livingston, only six weeks into the job as BT's chief executive, has suggested one route, but is it actually any different to what Sir Iain Vallance was proposing 12 years ago?

Deutsche Telekom is persuaded to invest at higher levels in Germany because of the fact that it is not obliged to sell its new capacity to anyone else. There's also no competition from Sky. It appears you cannot have both vibrant telecoms and pay TV competition and high levels of investment at the same time.

Perversely, competition seems to drive returns down to uneconomic levels for this kind of long-term investment. While there is competition there is always going to be an argument about who builds the new network and on what terms access is allowed. Demerging BT's wholesale from its retail interests might be one solution to the problem. For the time being, Ed Richards, chief executive of Ofcom, has said he's prepared to allow better rates of return, so maybe BT is in with a chance.

In the meantime, Mr Livingston has used the excuse of the promised new investment to cancel his share buyback programme. Personally, I've always thought buybacks a complete waste of money. In these markets, they are even worse, as they only provide an easy way for short sellers to close their positions. Here's hoping fast broadband proves a rather better use of capital.

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