The bankruptcy of the fourth largest investment bank in the US, Lehman Brothers, has triggered fears of a wider banking collapse.
On the same day as Lehman Brothers went under another giant US investment bank, Merril Lynch, was sold off to Bank of America after writing off assets worth more than $40 billion in the last year.
Former US Federal Reserve chairman Alan Greenspan described this as “a once-in-a-century type of financial crisis” adding “we will see other major financial firms fail”.
Before last weekend the US government had stepped in to prevent such bankruptcies.
Earlier this month the US treasury nationalised the two mortgage giants, Fannie Mae and Freddie Mac, at the cost of $5,400 billion.
But Henry Paulson, the treasury secretary, refused to bail out Lehman Brothers simply because the US government cannot afford to spend more to stave off such collapses.
Other US giants are already in trouble. Another major bank, Washington Mutual, is named by several analysts as the next to find itself in serious trouble. It has lost 92 percent of its market value in the last year.
The private equity firm Texas Pacific group poured in billions in the spring to rescue the bank.
But this no longer looks sufficient to satisfy investors and they are taking flight. It is possible shareholders will flee Bank of America, if they consider Merrill Lynch a bad buy.
All of this raises fears of a repeat of the 1929 Wall Street Crash when share prices slumped on Wall Street following a speculative boom.
As the US called on foreign loans to be repaid this created a banking collapse in Austria and Germany.
Across the globe governments acted to protect their economies by raising import controls. World trade collapsed. Trade wars were quickly followed by real wars as leading states tried to secure raw materials and markets by direct conquest.
The crisis was only overcome with the rearmament boom immediately prior and during the Second World War.
History never repeats itself but no one on Wall Street or in the City of London knows where this crisis is heading.
What can be guaranteed is that it will spawn economic and political instability – as Gordon Brown is only too aware.
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