Leading article: Our political leaders must wake up to the scale of the danger

Finance is in a frenzy, but politics is frozen: the parallels between the present situation and the months leading up to the great meltdown of 2008 are ominous. If we are to avoid a repeat of the chaos of three years ago, it is vital to recognise precisely what is alarming the markets.

The overriding concern is the solvency of banks and nations. Investors fear that financial institutions in Western economies are at risk of going bust because they will be forced to write down the value of their sizeable loans to troubled southern European nations. They also fear that Greece, Ireland, Portugal, Italy and Spain are not going to be able to grow sufficiently quickly to sustain their sovereign debt burdens.

This fear has been augmented by bad economic news in the US. The threat of a default on America's borrowings was avoided when Congress did a deal to raise the legal debt ceiling this week. But the stark slowdown in the US recovery has nevertheless pummelled investors' confidence. All of this has combined to create a pervading atmosphere of trepidation in financial markets around the world. And when investors are afraid, they sell shares. That is why stock markets have slumped dramatically during the past week.

The response of European and US political leaders has been weak. Last month, eurozone leaders did a deal in which they pledged to stand behind the single currency and its members. But that lacked credibility in the eyes of the markets because European leaders did not agree to extend the size of the eurozone bailout fund. Likewise, this week's agreement in Washington delivered too little. While it lifted the debt ceiling, it offered nothing that might boost short-term growth.

Such is the scale of the present market panic that a much more determined response from political leaders is needed. World leaders should break off their holidays and convene a G8 meeting. In recent years, the G20 has taken over as the most important inter-governmental forum. But in this instance, the smaller grouping is appropriate since this is essentially a crisis involving North American/European banks and states.

There are two imperatives for participants. They need to address the financial stability crisis by making it collectively clear that they will not allow systemically important banks to go bust. They also need to address market concerns about slowing growth. The question of how they do this is hugely fraught. The last banking bailout was expensive, pushing up government debt levels across the West. And populations have been outraged to see the bankers, whom they were forced to rescue, continuing to pay themselves enormous bonuses. Another series of recapitalisations, even if unavoidable, will not be popular.

As for growth, there are no easy answers. Interest rates are already at rock bottom, so monetary policy can achieve little more. And there is a danger that loosening fiscal policy in order to boost growth will make the market panic still worse. Yet national leaders must address these concerns. The alternative is to see the destructive market frenzy continue and for the global banking sector to grow steadily weaker. We know where those pitiless market forces ended up leaving the world last time. It is beholden on our political leaders to prevent history from repeating itself.