The time for a higgledy-piggledy, institution-by-institution and country-
by-country approach is over. It took me a while – arguably, too long – to realise the full dangers. Maybe it was errors at the US Treasury, particularly the decision to let Lehman fail, that triggered today's panic. So what should be done? In a word, “everything”. The affected economies account for more than half of global output. This makes the crisis much the most significant since the 1930s.

First of all, the panic must be dealt with. This has already persuaded some governments to provide full or partial guarantees of liabilities. These guarantees distort competition. Once granted, however, they cannot be withdrawn until the crisis is over. So European countries should now offer a time-limited guarantee (maybe six months) of the bulk of the liabilities of systemically important institutions. In the US, however, with its huge number of banks, such a guarantee is neither feasible nor necessary.

This time-limited guarantee should encourage financial institutions to lend to one another. If it does not do so, central banks must lend freely, even on an unsecured basis, to institutions too systemically significant to be allowed to fail.