At the historic moment when the House of Representatives passed Hank Paulson's bailout bill last Friday night -- thus, we must hope, despite early indications to the contrary, significantly improving the world's chances of avoiding economic cataclysm -- I was conducting some research into the Scandinavian solution. I don't mean the policies followed by the Swedish government to steer its banking sector through a near-terminal crisis in the early 1990s, of which more in a moment. I mean I was sitting in the back row of a packed cinema watching Mamma Mia! , the Abba-singalong movie, and observing the impact of a mass inoculation of feel-good on a crowd that had been battered with bad news all week. I can only describe the effect as a euphoric group high -- and it occurred to me that if only the global financial community could be persuaded to take half a day off, head for their nearest multiplex and lose themselves in this cheerful, escapist fantasy, maybe the panic would start to subside.

That may sound flippant, especially if you are one of the 300,000 British savers whose cash is currently locked up in Icesave, the internet-based subsidiary of the probably insolvent Landsbanki of Iceland. But there is a serious point here. What we have been witnessing is a bankers' and traders' nervous breakdown, a collapse of confidence so overwhelming that it has temporarily lost all touch with rationality.

I don't mean, I'm afraid, that the economic damage can still be limited to a short downturn if only the City would unclench its collective sphincter and return to something like business as usual. That is what I thought a month ago, but we have passed into unknown territory since then. As every day goes by in which banks decline to lend, traumatised consumers decide not to buy new cars and houses, and businesses of all kinds contemplate their strangulated cash flows and the redundancies they will have to make this winter, the depth of the coming recession becomes more apparent.

What I do mean is that gibbering fear on the part of the people who move markets is now driving this crisis towards consequences that no one could seriously have foreseen.

Tired of listening to financial pundits on Tuesday night, I asked a psychotherapist what she thought was the root cause: 'This isn't a fashionable word in my profession these days, ' she replied, 'but it's pure hysteria.' And the measures needed to restore sanity, we agreed, have more to do with mass psychology than with any textbook of central banking practice. What matters is what works, not what reinforces the principle of moral hazard or follows any particular ideology. To accuse politicians of dithering is unfair when the condition they are trying to treat mutates wildly day by day.