FANS of rollercoasters will know the feeling — that horrible tingle of fear and uncertainty when the carriage has finished its slow crawl to the top of the ride and you are about to plunge earthwards into God knows what.

That’s where we are in the economic cycle. There has been a steady drumbeat of bad news for the past year as the credit crunch and high oil prices have mauled first the banking sector and then consumer confidence.

Last week came the sickening lurch, the sudden drop into uncharted territory. Fannie Mae and Freddie Mac, the two government-sponsored guarantors of the American housing market, saw their shares halve in value and had to endure open speculation about whether they were bust.

Fannie and Freddie are not well known on this side of the Atlantic. You don’t need to know their intimate workings, however, to understand the dire consequences of their going under. Together they guarantee £2.5 trillion of US mortgages, about half of the total. If the government were forced to step in and take on the companies’ obligations — a doomsday scenario, but not one that seasoned Wall Street analysts have ruled out — America’s national debt would go up by one third. The dollar, already weakened by the sub-prime crisis, would go into freefall.

Despite reassurances from Hank Paulson, the US Treasury secretary, that no emergency action was imminent, the markets panicked. The Dow Jones dipped below 11,000 for the first time in two years on Friday before recovering to close just 1.1% down, while the FTSE fell 2.7%.

The chances of these fears receding quickly are remote and investors will be spooked as we enter this week.

There will be enough bad corporate news coming out in the next few days to keep them that way. For example building materials group Wolseley, which is heavily exposed to the US construction market, reports this week. Similarly, a slew of earnings downgrades for 2009 are imminent and these will make uncomfortable reading.

Among our captains of industry and banking the mood is very gloomy. I accept gloom can be lifted, but against the backdrop of Fannie Mae and Freddie Mac it is hard to see where the good news is going to come from.

The prospect of a couple of weeks in the sun — in the hope that during our absence the storm clouds over the financial markets will have subsided — is starting to look ever more appealing. However, I fear such hope is still too optimistic.

We are in the jaws of this crisis and until the banking system starts to regain confidence we will remain there. There are numerous anecdotal stories of businessmen going to banks to raise acquisition finance and being turned away — not because of a lack of liquidity but because the shutters have simply been pulled down.

That is why share prices continue to be hammered — in a market where banks won’t lend it is hard to put sensible valuations on assets. In that vacuum the market is making its own assumptions and it’s not good news. That is what is dragging the share prices of British banks ever lower. This will bounce, but it would take a brave man to predict when.

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