Credit fuels the modern economy, and if the dislocation in the money markets lasts another month or two, investment, consumption and growth in the real economy will suffer. Central banks must restore confidence, but rather than cut interest rates they should extend liquidity operations to longer matur­ities, more collateral and possibly even different counterparties.

Liquidity injections by the Federal Reserve and European Central Bank have brought down overnight interest rates, but longer-term borrowing is still unusually expensive, while US Treasury bills have been trading at panic levels of below 3 per cent. It is hard to borrow using collateral not issued or guaranteed by a government. Central bank intervention has not worked so far.