So uniform through space and time are the responses of economic policymakers to any bit of financial turbulence these days that one can only assume they come from some sort of global government textbook.

However bad the decline in equity prices, however large the volatility in currency, credit or commodity markets, Treasury secretaries, finance ministers and chancellors of the exchequer all reach for the same scripted mantra: “The economic fundamentals are sound.”

The textbook has certainly been well thumbed in the past week. Billions may have been wiped off the value of shares, gyrating currency markets may have bloodied investors from Tokyo to New York, but government officials have sounded as upbeat as the Black Knight in Monty Python and the Holy Grail after his limbs and his torso had been hacked away: “Just a flesh wound,” the head still shouts defiantly. “Nothing to worry about.”

At the weekend Henry Paulson, the US Treasury Secretary, took up the soothing words of Ben Bernanke, the Federal Reserve chairman from last week, insisting all was fine. Since it is the job of officials to exude calm in the face of chaos, it is generally reasonable to be a little sceptical about their sang-froid. But we need to consider the alternative. Just because they have to say everything is all right in these circumstances does not necessarily mean that everything is not all right. You can always find some evidence in the economic data for concern, even at the best of times. But the fundamentals do indeed seem robust right now.

Just a week or two ago, investors were marvelling at the “soft landing” engineered by the Fed, as US growth eased gently into a range comfortably above recession levels and inflation fears were ebbing away. Concerns linger about the housing market. The weakness of the sub-prime mortgage business is certainly unnerving, but only if it really is contagious for the rest of the financial sector.

But it is in the very nature of the sub-prime market – where lucky borrowers can get access to otherwise inaccessible mortgages for double or triple the standard interest rate – that it can get uncomfortable when rates rise and the value of housing declines somewhat. Politicians have been trying to suggest that international investors are losing confidence in US financial viability. Hillary Clinton said last week that Wall Street’s 4 per cent decline was sparked by fears about the US fiscal deficit. Aside from the fact that this is an odd piece of analysis to explain a decline that began in the hermetically sealed Shanghai stock market, it is just flat wrong.

The US deficit has actually been declining for the past few years and is now at levels that are far from outlandish by historical or global comparison. What is more, demand for US Treasury bonds actually surged last week amid the turmoil, which hardly suggests a sudden loss of confidence in official US creditworthiness.

If economic fundamentals do not warrant a sudden downgrading of equities, then financial fundamentals look even less alarming. According to research by UBS in the US, even before the last week’s decline, equity price-earnings ratios on the main US and European exchanges were below where they were in September 2003, when stocks were still bouncing along at levels not much higher than the bottom of the bear market that followed the collapse of the technology bubble in the early 2000s.

So the official spin might just be correct this time. Unfortunately, this doesn’t mean that we can all relax. There may still be very good reasons for what is going on at present (even if hardly anyone spotted them until last week).

The likeliest explanation is that some much-needed repricing of risk is going on in global markets. In the past couple of years, credit spreads have narrowed to implausibly small differentials. The difference between the yield on US treasury bonds and dodgy-looking corporate debt of the same maturity had shrunk to its lowest level in years. In global markets, investors also seemed to be ignoring the credit, liquidity and foreign exchange risks inherent in many investments.

To put it bluntly, investors had been behaving as though the risk associated with a financial institution that lent money exclusively to people who were distinguished by the possibility that they might not be able to repay it was barely greater than the risk of lending money to the US Government.

This lack of differentiation has been reflected in an eerie absence of volatility in financial markets for some time. A bit of proper risk assessment and even a bit of volatility may be good things.

What would not be a good thing would be markets coming to assume that they will be bailed out by governments if they get into too much trouble – the very opposite of proper risk assessment.

Sadly there are some signs that may be happening.

Yesterday, in the wake of all this financial turmoil, US futures markets were implying a nearly 90 per cent probability that the Federal Reserve will cut interest rates this summer. In other words, with the US economy still posting solid growth, investors think the Fed will be forced to ease up on its campaign against inflationary pressure to help financial markets out of their little rut. Now that would be a sure sign that the fundamentals are all wrong. gerard.baker@thetimes.co.uk

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