No one can yet say how bad it is
The most worrying aspect of all this is how little the politicians and regulators knew of what was g
These are nail-biting times for world economic policymakers. There is an illusion that through sound management our political and financial leaders can cancel the boom and bust of the economic cycle and overcome the forces of greed which drive markets.
This is being cruelly exposed by global financial markets as a myth.
The economic policymakers are doing their best. In the United States, Ben Bernanke, the chairman of the Federal Reserve, has responded to Wall Street's calls for easier money by cutting headline interest rates by three-quarter of a point to 4.5 per cent since September in an effort to prevent the spread of the toxic debt problem, which began with America's trailer-park mortgages.
In Frankfurt, the president of the European Central Bank, Jean-Claude Trichet, pumped huge amounts of cash into the money markets to ease the strain.
Here, the Bank of England, with the authority of the Chancellor Alistair Darling, has so far pumped an extraordinary £23bn into the stricken mortgage lender Northern Rock - with which he incidentally has his own mortgage. It doesn't help that the Bank of England's governor, Mervyn King, and the Chancellor are at odds over who is to blame for the Rock fiasco. Darling is as helpless to deal with the credit crunch as Norman Lamont was at the time of Britain's expulsion from the Exchange Rate Mechanism in 1992.
Despite the fact that western leaders have, over the decades, put in place a host of institutional arrangements designed to pre-empt crisis - ranging from the Bank for International Settlements in Basle to the IMF in Washington - they have proved powerless in the face of global market eruptions.
All that finance ministers and the central bankers who command them can do is to behave like a clean-up crew after the event: forcing disclosure, improving regulation and punishing the wrongdoers.
Any hope that the tourniquet applied by central banks in August would stop the bleeding have been disappointed. Major banks from around the world have been confessing their sins. The noise from these admissions reached its peak on the first weekend of November when Charles Prince III fell on his sword at Citigroup, the world's largest bank, after it admitted to sitting on at least £3.1bn of bad debts and unveiled a 57 per cent fall in profits.
His departure came rapidly on the heels of the resignation of Stan O'Neal, the African-American chairman of Merrill Lynch, as well as the bosses of Wall Street house Bear Stearns and the Swiss bank UBS. The rapid departure of these bankers had nothing to do with the commands of elected politicians. It was the response of boards to the recognition that the executives they had put their faith in may have behaved irresponsibly.
The most worrying aspect of much of this is how little politicians and regulators knew of what was going on. Banks generally follow rules set by the Bank for International Settlements. This institution has been around since the end of the First World War when it was established to handle German reparations.
The Basle rules require banks to keep a proportion of their assets in cash and high-grade government securities, which can protect financial institutions from failure in times of crisis. But it also means that the funds tied up as capital cannot be used to fund loans when the world economy is expanding.
So, many of the banks came up with a neat wheeze. They established new-fangled funds known as "conduits" and "structured investment vehicles" or SIVs for short, which were run by the banks but not part of them. As they were hidden and "off balance sheet", there was no need to observe the Basle rules.
This is where, it turns out, many of the losses on subprime mortgages and other debts are located, out of reach of regulators. No wonder that the fearsome American regulator, the Securities and Exchange Commission, is checking for illegality.
The uncertainty created by the decision of the US banks to come clean on these vehicles is what caused the latest fall in the shares of Barclays, Alliance & Leicester and other British banks. Nervousness, about their exposure to exotic debt and secret vehicles has been exacerbated by the swelling taxpayers' bill for Northern Rock.
Alistair Darling expresses hope that the Northern Rock crisis will be cleared up in a matter of weeks. The truth is that he doesn't know and conditions at the Newcastle lender are becoming worse; a large chunk of its mortgage book is now loss-making.
The train crash on financial markets is worsening and starting to damage high street spending and manufacturing investment. Financial leaders have only one weapon to deal with this - cutting interest rates. But it could take up to 18 months for the full benefits of such action to be felt.
Alex Brummer is City editor of the Daily Mail