Global stock markets plummeted on Thursday of last week, as the US Federal Reserve revealed plans to scale back its programme of printing money.
It was Wall Street’s worst day for 18 months, and there were sharp falls on markets in Europe and Asia too.
By Friday there was some recovery but it was a stark reminder of the fragility of the world economy.
Five years since the collapse of Lehman Brothers, governments are gambling that they are—as George Osborne put it—out of “intensive care”.
They are trying to get away from the measures they took to halt the financial meltdown.
In Britain this means selling off the government’s shares in bailed out banks—at a loss.
Osborne says he’s ready to sell the stake in Lloyds now. He also pushed Stephen Hester out at RBS to split it into a “bad bank” for the government and a “good bank” to sell off.
But the new banking regulator is warning that all Britain’s biggest banks are still vulnerable to failures.
And the Cooperative bank only narrowly avoided bankruptcy this month.
The other aspect is stopping printing money, or quantitative easing.
Bank of England governor Mervyn King lost his last vote before retiring last week.
He wanted to pump out another £25 billion, but was outvoted by bankers who said recovery was on the way.
This is risky in Britain, but it’s a vastly bigger risk in the US where the Federal Reserve has spent £54 billion every month.
Top banker Ben Bernanke thinks the programme has served its purpose. He revealed plans last week to cut it back this year and abolish it in the middle of next.
That caused the markets’ panic—without the Fed’s cheap credit many firms could fall back into crisis.
China could already be teetering on the brink of its own new credit crunch.
Interest rates that Chinese banks charge to each other reached new highs last week.
China mostly avoided the crisis because its government spent billions and its banks rushed out loans to help firms cope with lower demand from the recession-hit West.
But many of those loans are taking heavy losses.
And the Chinese government and central bank are cutting spending and cheap credit in response to its economic slow down.
Much of China’s banking system is illegal and made up of unregulated “shadow banks”.
This obscures the real state of China’s banks.
The threat of a Chinese crunch at the same time as the end of free money from the US has given the markets a scare.
It could easily give them much more than that.