We’ve talked often on this blog about the necessity to have confidence in the banking system. Paper money is, after all, just paper.

There’s no point playing the blame game. It’s all about what we do now.

Although G7 and the IMF have gone to full battle stations the reality is the die is cast. Markets have crashed, liquidity has disappeared, credit is history and the revaluation and squaring up of positions has to somehow be undertaken.

The margin calls will be coming thick and fast next week. The derivatives nightmare is a beast matched only by the legendary Hydra. Each cut brings forth two new disasters.

The choices facing policymakers are stark and , for them, almost unbelievable.

- Public interest free money will need to be pumped into the system. Not to cover debts but to provide a boost to a money supply which is disintegrating as loans are written off. This should not be a bank bailout but a reconstitution of a money supply from the public. Banking for now is suspended and banks are likely to be worth very little unless they are very well capitalised and have little exposure to falling asset prices. Bank deposits will be uncondtionally guaranteed under this approach.

- Stock markets: Next week will see a wave of selling that can only be described as a death spiral. It is hard to see any approach other than freezing all global stock markets. The alternative is for governments to start buying stocks i.e. nationalisation of business. That would be a very big call but is possible.

_ Currencies: There are potentially very crazy moves ahead. Deficit countries will see huge sell offs so some kind of coordinated intervention will be needed here. It may not be physical but more a guarantee between creditor and debtor nations to maintain current levels.

This is going to be a momentous week. Let’s hope policymakers are up to the task .

Either way

Tags: banking, central banks, financial crisis, intervention, markets, money