Business - FT.com

"Crash" is a sensitive word in markets. By common consent, there have only been two in the stock markets of the developed world: in October 1929 and October 1987. Must we now add October 2008 to the list?

Short selling may be out of favour, widely blamed as one of the most dangerous of the unregulated excesses of market capitalism, but China's stock market regulators are apparently not worried by that.

The events of the last few weeks culminating in Monday's dramatic stock market falls have changed the financial world in a way few would have thought possible.

The price of copper capped a torrid third quarter on Friday with the second largest weekly fall for the benchmark London Metal Exchange three-month contract, 11.8 per cent to $5,977.5 a tonne.

The need for General Electric, long regarded as the gold standard of corporate credit quality, to raise $15bn in capital to quell concerns about its financial health is the starkest evidence yet that the credit crunch is hitting companies big and small.

In the over-the-counter derivatives markets, the great clear-up seems to be gathering pace.

The start of the fourth quarter on Wednesday eased some of this week's surge in overnight funding rates, but was unable to thaw the freeze in longer term lending.

The recent collapse of global financial institutions and severe malfunctioning of the inter-bank lending markets have fuelled concerns over the fallout from a systemic banking crisis, but should not spark a run on the dollar, says Lee Hardman at Bank of Tokyo-Mitsubishi UFJ.

The US Congress's rejection of Treasury secretary Hank Paulson's Tarp initiative means that global recession is inevitable and the credit crisis will get worse. The risk of systemic financial failure has risen, but we expect all major financial institutions to be saved in case of necessity. While worsening credit conditions, global liquidity contraction and global recession were already our forecast, they will now become everyone's.

Within the past few weeks the financial crisis that started more than a year ago has deepened by several orders of magnitude. In spite of unprecedented governmental and central bank interventions in the US and elsewhere, some elements of the financial intermediation process are dysfunctional. This environment has given rise on Wall Street and Main Street to an atmosphere of fear and uncertainty.

Lending between investors and financial institutions remained at a standstill on Monday, as the end of the third quarter and further global banking problems was compounded by US lawmakers failing to pass the Treasury's $700bn plan to purge the system of toxic assets.

Writing anything about this financial crisis is nerve-racking. People may be reading how financial journalists wrote about this crisis decades from now, and things we now accept as unquestioned orthodoxy may come to be ridiculed. I am acutely conscious of this as I covered Washington Mutual (NYSE:WM) for the Financial Times in the late 1990s.

The Merrill Lynch executives who took the decision to sell off a bunch of complex mortgage-related debt assets at about 22 cents in the dollar during the summer could have good reason to feel peeved once the US market bail-out plan is finalised.

Money market conditions deteriorated further on Thursday illustrating the complete breakdown in lending among investors and banks.

Markets on Wednesday reflected two different realities. Equity markets behaved with what could almost be called calm; credit markets returned to the historic distress seen last week.

Warren Buffett's purchase of a $5bn stake in Goldman Sachs (NYSE:GS) is a more powerful message to the market than Hank Paulson's proposed $700bn bailout, and supports the view that stocks finally offer good value, says Charles Dumas at Lombard Street Research.

By late morning in New York on Monday, the price of oil had climbed by 20 per cent in barely five days and scarcely anyone had noticed. Then it went into overdrive, hitting $130 at one point before settling at $120.92. Last Tuesday, it traded at $90.51 - a swing of 44 per cent from bottom to top.

The price of oil has risen 20 per cent in the past five days and barely anyone noticed. That is because oil's upheaval is little more than a residual of the financial crisis.

Despite the enormity of current challenges, if there was ever a good time for the US, and the world, to face these remarkable challenges, this is it. That is because of the extent to which consumption in the leading emerging market economies - Brazil, Russia, India and China (BRIC) countries - should be able to offset the slowdown in the US.

Investors hoping that the US government's proposed $700bn Troubled Asset Relief Program to buy banks' toxic assets will signal a bottom for equities may be disappointed, says David Rosenberg, north American economist at Merrill Lynch.

After Friday's record breaking rally it is tempting to think the worst is over for the UK equity market. But is it? Or is there further pain ahead?

"A panic whose destructive power and chilling effects surpassed all other financial gales that swept over Wall Street," wrote Henry Clews.

Dramatic steps to prop up the Chinese stock market were unveiled by Beijing on Thursday after a 70 per cent fall in stock prices since last October.

Short-sellers did not force the biggest banks in the US to extend credit to people and companies who could not repay it. Neither did regulators.

To the relief of many in the derivatives industry, the US government's deal to take control of AIG in return for an $85bn lifeline does not appear to have triggered defaults on credit derivativesor to have terminated the many trades to which AIG is a counterparty.

There are no one-way bets in markets - but occasionally the government can create some.

The Federal Reserve's failure to cut US interest rates on Tuesday suggests that we are witnessing the demise of the so-called "Greenspan Put," says Richard Bernstein, chief investment strategist at Merrill Lynch.

The cost of protecting corporate debt against default set fresh records on Tuesday, outstripping even the levels seen in the run-up to the demise of Bear Stearns (NYSE:BSC) when concerns about financial company risk were at their highest.