By last night there was a massive credit squeeze under way throughout the Western banking system. Wild rumours swept the City and Wall Street of loans being called in, of huge losses across a raft of top-drawer names, and Lehman Brothers was forced publicly to deny it was filing for Chapter 11.
Meanwhile, here in the UK, the equity market looks cheap set against the US, the Continent and bonds, but with sentiment as bombed out as it is, that counts for nothing. Just as in a bull market all sensible valuation analysis goes out the door in the scramble for stock, in a bear market the same is true but in reverse. It doesn't matter that a stock is inexpensive; nobody wants it anyway.
What's happening to world equity markets can no longer be described as an overdue and healthy correction. Over the last month, the mood has moved decisively away from the "buy on the dips" approach which has served investors so well over the years, into a "sell into the rallies" one. If you want to see what a real bear market looks like, as opposed to the little blips we have seen in the West over the past 30 years, just look at the graphic charting the Nikkei's nine years of misery. Few are yet suggesting that this is the outlook for Wall Street and Europe as we move into the new millennium, but certainly we seem to be living through one of the great defining moments in financial markets, and the end game is far from clear.
To see the extent of the damage, look no further than Barclays and Siebe - two top-drawer but very different FTSE 100 companies. Both share prices have nearly halved from their peaks this year, a quite sickening plunge for anyone who bought at the top and one that will send dismay into the hearts of long-term holders. Both are highly exposed to the traumas now afflicting the British and world economies - the one as a bank joined at the hip to the business cycle and with some exposure, albeit limited, to emerging markets, the other as a diversified international engineer.
Were it not for the utilities, which behave more like bonds in a downturn than ordinary shares, and telecoms, a sector investors have yet to lose faith in, the FTSE 100 index would be heavily down on the year. As it is, it is already into negative territory. The vast bulk of the rest of the market reached that ground some time ago. In the US and on the Continent, the picture looks very similar.
In the absence of a significant, coordinated cut in western interest rates, it's hard to see anything on the horizon that might rescue stock markets. Many brokers are now forecasting nil growth in UK corporate earnings this year and not much better for next. The picture is a little brighter in the rest of Europe, where there's still huge scope for corporate cost cutting, but with the dollar now weakening fast against core euro currencies, not significantly so. Meanwhile, forecasts for earnings growth in the US are being slashed daily.
For the first time since the Asian crisis broke, there seems to be a real risk of a world-wide credit crunch. Already no one will lend to emerging markets; that's taken as read. Now there is growing concern about the reliability of counter-parties, spreads are widening dramatically, credit lines are being recalled, and banks throughout the West are announcing big provisions.
Seemingly, there's another big loss announced in the banking system every day with much worse to come widely rumoured. This cannot help but have a real effect on the supply and availability of credit, not just to hedge fund operators and other high-risk speculators, but to all parts of the economy. Money lost in one market means less to lend in another. There could be a quite severe liquidity drought building.
Events seem to be conforming to an alarming stereotype. This is what happens when a speculative bubble goes pop. Everyone loses a lot of money, liquidity dries up, and the situation becomes even worse.
There is an obvious policy response to such circumstances - to cut interest rates. Unfortunately, central bankers have so far proved very reluctant to do so. There was a cut in Tokyo this week, but rates are already so low in Japan that its effect on demand cannot be any more than marginal.
In the US, Alan Greenspan, chairman of the Federal Reserve, continues to worry about inflationary pressures in the economy, though there appeared to be a slight easing of his position in a recent speech where he acknowledged that the US economy could not remain immune to the turmoil in world markets.
In Continental Europe, interest rates are already as low as they safely can be without stoking up an inflationary boom, while here in the UK, the Bank of England this week again resisted pressure for a cut in rates in an effort to force inflation back to the target level.
In summary, there appears no great appetite among policy-makers for the one thing that might put a floor under falling stock markets - a convincing and concerted easing of rates. Whether Monday's meeting of G7 deputy finance ministers in London can convince them otherwise remains to be seen. The politicians can yell and scream all they want about the need for such action, but they don't call the shots.
Things could, none the less, be on the move at last. The Bank of England's Monetary Policy Committee took the unusual step on Thursday of commenting on its decision to leave rates unchanged, and in so doing it recognised that a further deterioration in the international economy might require a rate cut. This is progress indeed. The Bank has at least left the door open for movement should anything concrete come out of the G7. The danger for markets is that whatever action central bankers do eventually take will be too little too late.