Banks are not to be trusted. This is not just the view of the public and policymakers, but that of the banks themselves. Spreads on unsecured inter-bank lending have reached unprecedented levels, particularly in dollars and, to a lesser degree, sterling. Such stresses cannot continue for long, without serious damage to both the financial system and the economy. Something has to be done. The question is: what?

Yesterday's spread over one month between the London interbank offered rate and future expected policy rates was close to 200 basis points for dollar loans and 120 basis points for sterling ones. In the case of dollar loans, the spread was nearly twice as high as at any point since the crisis began in August 2007. Market stress has evidently reached frightening levels.