Leading article: A gloomy outlook, especially in this country

One week ago, the markets responded to the £100bn injection of funds by the US Federal reserve and the European central banks by marking up shares in a brief burst of relief and optimism. Yesterday, they responded to the Fed's action in organising a rescue of the Bear Stearns investment bank by marking stocks down by as much as five per cent across the globe. This, as Alan Greenspan, the legendary former head of the US Fed said yesterday, is shaping up to be the worst financial crisis since the Second World War. It made a mockery of the sanguinity of the British Chancellor, Alistair Darling, about British prospects in last week's Budget. And it raised urgent questions about how far this crisis could feed across the world, stemming growth, curbing lending and undermining confidence.

What started out as the just rewards for imprudent lending by US financial institutions in poorly-backed mortgages has now blown up into a crisis which has caused the financial markets virtually to seize up. Banks, uncertain of their own exposure and suspicious of the state of other banks, have ceased to lend. Interest rates in the inter-bank markets have risen way above the levels set by the central banks. Rumours have abounded as to which bank is next in trouble and this in turn has made the markets even more jittery, which in turn has started to affect investment and the stock markets – and hence consumer confidence.

Will the latest actions by the US Fed and by the Bank of England to increase liquidity in the market in the wake of the Bear Stearns collapse prove any more effective than its measures last week? Certainly, the US Fed and Treasury have acted with impressive determination and speed (in marked contrast to the stuttering response to the collapse of Northern Rock by the Bank of England and the Treasury). The Bear Stearns rescue, the reduction in lending rates and the added liquidity are all there to prove that the US authorities will do whatever they think it takes to stop this crisis spreading and restore confidence.

That is all well and good. The trouble is, however, that so long as there is no certainty about exposure, nor about the state of the housing market, then banks will continue to be cautious about lending. So long as this is true, reducing interest rates and even increasing liquidity will not serve to open up the credit markets. The added problem is that the troubles in the financial section are occurring just as the US is moving into recession, while the economies of China and India, the new engines of growth, are beginning to slow under the pressure of rocketing raw material and commodity prices and rising domestic inflation. When the US sneezes, the rest of the world no longer necessarily catches pneumonia. But when the American economy freezes just as the price of raw materials goes through the roof and the banking system seizes up, then the global outlook is gloomy.

This is not the end of capitalism. Eventually, the bottom will be reached in the US housing market, the financial institutions will have a clear idea of their liabilities and, slowly, confidence and lending will return. But who knows how long this will take? In the meantime, the world faces the depressing prospect of a prolonged period of slowdown as the ramifications of a crisis caused by profligate American bankers are worked out around the globe. That uncertainty is particularly profound in the UK, which has a similar reliance on housing prices as its main engine of growth, plus a greater dependence than any other major country on financial services as a mainstay of its economy, foreign earnings and investment. After this weekend, Mr Darling's sanguinity of last week looks not just over-optimistic but positively irresponsible.