An experienced and very senior figure in global central banking, someone not given to alarmist observations about the customarily prosaic business of his profession, described the state of the world's financial system to me over the weekend as like that of a patient who has experienced multiple organ failure.

The market for securitised assets collapsed some time ago. The interbank lending market is flatlining. The commercial paper market is shutting down. The world is in danger of losing the financial equivalent of its circulatory, respiratory and central nervous systems. Of course, the analogy is not quite right. The world economy is not about to die. How is that for good news? It is a sign of the historically dire situation we face that the fact that our economy is not, in a literal sense, going to perish is one of the few small sources of optimism we have.

This week promises to be another tumultuous and possibly pivotal one. Attention will shift once again back from elected politicians in Washington and European capitals towards monetary policymakers, and the week will be capped off, when we get there, with the annual International Monetary Fund meetings and an unusually interesting gathering of finance ministers and central bank governors in Washington.

But the turmoil yesterday again underlined the problem. To extend my friend's metaphor, the authorities are battling to stabilise the patient but are acting like a team of junior doctors fighting over whether to apply the defibrillators or try something different.

The passage of the Paulson plan by the House of Representatives last Friday has shown, at best, the truth of the proposition that it was always a necessary but not sufficient condition for financial recovery. At worst, it is possible, as another senior financial official put it to me at the weekend, that it simply came too late.

The problem, evidently, is now way beyond the actual challenge to the global economy posed by the plunging value of asset-backed securities. Even if you take the very worst-case estimate of the scale of these losses - and double it - you get to maybe $3,000 billion. This is still less than 10 per cent of the combined GDP of the American and European economies. Throw in the Chinese and Japanese economies and that figure drops to below 5 per cent.

How can such a relatively small number cause so much damage?

The answer, of course, is confidence. Just as banks pulled off improbable levels of balance sheet leverage in the boom years, so the banking system, through the failure of trust, has a highly leveraged impact on the whole economy.

Yesterday the Federal Reserve once again dramatically upped its intervention, promising to increase its liquidity injections to $900 billion and introducing the payment of interest on banks' reserve accounts at the central bank in an effort to persuade them to place more money on deposit there.

Yet there was little evidence that the actions were having much effect. There was no appreciable sign of a thaw in the frozen credit markets as banks continued to decline to lend to each other for anything other than the shortest of maturities - overnight.

There is now a firm expectation in the markets that the Fed will follow up with another cut in interest rates. The US central bank's Open Market Committee is not scheduled to meet again until the end of the month but these days three hours is a long time to wait for emergency action, let alone three weeks.

The case for a rate cut was strengthened dramatically last week with the latest evidence that the economy is in recession: further contractions in employment and a startlingly large decline in manufacturing activity in September.

Some wonder what effect a rate cut would have. If banks aren't lending at all, what does it matter if you cut the rate at which they lend? What's the point of lowering the federal funds target rate from its present 2 per cent to 1.5 per cent or less?

The answer is that banks need to be reassured that there is unlimited money available from the central bank. In fact, serious economists now argue that the Fed should not cut borrowing costs but in effect eliminate them, by slashing the funds rate to zero and massively increasing the amount of money it makes available to financial markets.

But there's a growing consensus in markets that this needs to be a global response. Action by the Fed would be greatly amplified if the European Central Bank (ECB) and the Bank of England - and, to a lesser extent, because its problems are different, the Bank of Japan - were to join it. Co-ordinated action would also protect against the risk of serious currency dislocations. Money is sloshing around the global economy at unfathomable speed, further threatening the stability of any number of countries' financial systems, an aggressive Fed rate cut might produce a terrifying flight from the dollar.

But, curiously, the Europeans still seem slow to grasp this. At a time when its financial system is close to shutting down, the ECB holds its main market interest rate at 4.25 per cent; the Bank of England's is even higher.

The patient is going under but the doctors are still quibbling about his medical history.

gerard.baker@thetimes.co.uk

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