If subprime mortgage defaults were a nasty cough, and trouble at hedge funds and minor European banks were the start of a fever, the near collapse of Bear Stearns marks the onset of chest pains. Where before the diagnosis was influenza, pneumonia is now a possibility. But a doctor would not panic – and nor should the public authorities with generalised bail-outs. They should mount a programme of action to treat the disease, slow its progress and encourage the patient.

The credit squeeze can continue and can get worse: vulnerability abounds and contagion could yet spread further. Equity markets are valued well above their long-run averages relative to cyclically adjusted earnings and the replacement cost of their assets. The US housing market and those in other countries remain expensive relative to earnings and rents. And in addition to leveraged hedge funds, brokers and structured vehicles that could be forced to sell assets quickly, there are institutions with lending facilities that must be renewed in 2008 and 2009.