It was the day when the banking industry stepped back from the brink. Twenty-four hours earlier Bear Stearns had been whisked away in a JPMorgan ambulance and Lehman Brothers was being sized up for a coffin. The chickens were headless and the panic contagious.

But yesterday financial Armageddon was off, or at least postponed. Soothing noises from both Lehman and Goldman Sachs suggested that the worst fears about Wall Street firms were overdone. Lehman’s results, in particular, provided balm. It is brim with liquid assets and even its $67 billion (£33 billion) portfolio of mortgage-backed securities looks less toxic than feared. It was also keen to demonstrate it is not just a bigger replica of Bear, but it is a more diversified beast, with franchises in equities, mergers and acquisitions and fund management as well as credit.

Then came the welcome bit of pain relief administered by the US Federal Reserve. The three-quarter-point cut in the base rate was well flagged and, if anything, slightly less than expected. For the credit markets, it was largely symbolic: the problem is not with the price of credit, but the shortage of supply. For them, earlier measures to give easier access to emergency credit to securities firms and to relax collateral requirements were much more important.

However, for the wider US economy, the cut was crucial. The authorities are showing they can move boldly to head off recession or at least mitigate its worst effects. The base rate in the US is less than half its level of last September. The argument that the Fed is running out of ammunition and should have conserved its fire power for tougher times ahead looks flawed. When your house is on fire, you throw on the blaze every drop of water you can find; you don’t keep bucketfuls to one side just in case.

Even now, a Fed Funds rate at 2.25 per cent is still well above the interest rates nadir reached in 2002 after the 9/11 atrocities and the bursting of the dot-com bubble. Arguably, the American economy is looking even more fragile than then.

The revolt by two of the Fed’s inflation hawks, who argued for a smaller cut, was strangely reassuring. If anyone in US financial markets is still worried about inflation just now, then things can’t be nearly as precarious as they feel. With tax rebates of $160 billion due to provide a fiscal boost in the third quarter, the American authorities are throwing energy and money into staving off recession. The crisis is far from over. There will be more financial casualties. There is still a great chill coming to Wall Street and Main Street. But yesterday provided a glimmer of hope that both will withstand its worst effects.

patrick.hosking@thetimes.co.uk

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