City Eye: Monoline fears may not just be Teutonic melancholy

As I write this column, it's a bright, sunny day. The herons have returned to their Thames-side hunting grounds, and God is quite clearly in his heaven. But then the walls of Jericho probably looked pretty comforting just before they came tumbling down.

For once, the ominous news doesn't come from the US, nor yet from the rightly criticised too-little, too-late banking policy of UK commercial and private bankers. On the latter subject, I'm surprised at all the tut-tutting from commentators over brutal foreclosures and new, scorched-earth lending policies. Our banks are big, lumbering entities that make money simply because they are big and leverage that fact.

Talk of creativity and dynamism is dissimulation of Orwellian proportions: banks make money from muscle, and if they take a hit, they make sure that their customers do too. Otherwise, the balance of power might change and they would have to abandon bullying and brutalising – two of their core competences. In the long run, it makes good commercial sense to withdraw credit lines. It keeps customers in order. The late comedian Bob Hope once said a banker is someone who'll lend you money provided you can prove you don't need it. Quite.

What is alarming is the news futher east. I refer to monoline insurers and the pronouncement of Josef Ackerman, the chief executive of Deutsche Bank, that a potential "tsunami" awaits us if these firms have their creditworthiness downgraded. Monoline insurers provide cover for bonds around the world, and the knock-on effect of any downgrade would be a fall in the value of these bonds. Estimates vary as to the size of the problem, but investors having to swallow a $180bn (£93bn) loss is a conservative figure. Some analysts put the number as high as $220bn.

The nastier consequence is the potential secondary effect. Monoline insurers are the financial world's equivalent of Atlas. They guarantee some $2.4 trillion of bond debt. So quis custodies custodiet? Or rather, who guarantees the guarantee-ers?

The German psyche is still scarred by the horror of the hyper-inflation that followed World War I. It lingers on in Frankfurt and Bonn. So when Mr Ackerman hinted at a colossal wave of collapsing bond values, the consequent closing out of stop-loss positions, and the free-fall into implosion that would follow, then maybe – just maybe – he was indulging a Teutonic penchant for market melancholy.

It is to be fervently hoped so. Because the Northern Rock crisis will be as nothing compared to the problems that would follow a collapse in confidence in the security of the insurers. Bear in mind it's the high-street names we know and love – the Avivas, Standard Lifes, Prudentials – which invest so heavily in the solid, safe debt that the monolines guarantee.

The ultimate meltdown would trigger a total lack of confidence in paper. There's a famous story of two women taking their savings to a bank in Weimar-Republic Germany. They had two washing baskets full of 10-billion Mark notes – about enough to buy a week's groceries. But the baskets were so heavy, they left one at the door of the bank and took the other to the cashier. Realising what they had done once their transaction was complete, they rushed outside to find that they had indeed been the victims of theft. Someone had stolen the washing basket. At least that wasn't a depreciating asset.

As yet, it's not time to sell every share or bond you have and buy physical commodities: wine, cigarettes (a major currency in Berlin in 1945) and tins of baked beans. But do watch out for the insurance meltdown.