Anyone who thinks that the United States is the land where the free market is allowed to let rip while Britain is the home of regulation and state intervention should study the different reactions of central banks to the crisis in the money markets that has been with us since September.
Last week, the value of shares in Bear Stearns dropped from $61.58 to $54.28 in one day, as the market sensed trouble in one of the US's largest banks. When its staff turned up to work on Monday morning, the crisis was over. Their stricken bank had been bought by JP Morgan Chase for $2 a share with loaned money by the Federal Reserve, and with the Fed carrying the risk. The Fed has also opened a "discount window" for the first time to give other securities firms access to credit that previously was only there for banks. For good measure, they have cut interest rates again.
Last August, Jean-Claude Trichet, president of the European central bank, was relaxing in a French fishing village when news reached him, via his BlackBerry, about the crisis in the US sub-prime market. He instantly flooded the eurozone with liquidity, a decision which inspired the Financial Times to name him as "Person of the Year 2007". How very different from the tortoise-like behaviour of the Bank of England and its Governor, Mervyn King.
On 12 September, Mr King submitted a memo to the Commons Treasury committee on how British banks should behave. He emphasised the principle of "moral hazard", which says that enterprises that act recklessly and run into trouble must be left to suffer the consequences of their folly, without any help from Government, as a salutary lesson to others. If the Government rescued the reckless, there would be no incentive for anyone to act responsibly, he feared. On that principle, Mr King proposed that the Bank of England should not lend money to banks that could not borrow from one another during the credit crunch, because "the provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises".
In the six months that followed, we have seen Mr King reluctantly eat his own words. He knew when he wrote that memo that a storm was about to break over Northern Rock. The rest of the nation found out two days later, and the UK witnessed the first run on a bank for more than a century. After six frantic months, the Government had to throw the principle of "moral hazard" overboard and take responsibility for Northern Rock's debts. In the past week, Mr King has also had to make £10bn worth of liquidity available to other banks, in the teeth of his own warnings about being fair to those who "sat out the dance". Yesterday he met executives of the five big High Street banks, to be told it was not enough.
In normal circumstances, Mr King would be right. Over the long term, his caution may even be vindicated. But the crisis is too urgent and too severe to sit back and wait for the market to penalise the reckless and let the lessons be absorbed. We are all going to find it harder to borrow money. The days of the 100 per cent mortgage are dead. We are in danger of being dragged into an economic vicious cycle.
In these dire circumstances, the overriding duty of the Bank of England is to send out the signals that instil confidence. Mr King should ponder the warning made by the former US Treasury Secretary Larry Summers that "the world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself".