The European Central Bank (ECB) remains obdurate about cutting its 4pc interest rate despite the Fed going to the brink of its powers in Washington.

U.S. rates are expected to be cut by a whopping 1pc to 2pc today giving America an effective zero interest rate when inflation is taken into account.

The flight from the dollar will only get worse, especially with the ECB giving a two-fingered salute to the American authorities. It’s said that the eurozone (which does not include Britain) is in no mood to help the Americans — a situation similar to 1987, when the Bundesbank let the dollar slip into freefall, spooking the markets into a catastrophic drop.

Let’s not beat about the bush, Europe is engaging in a financial war with the U.S. As long as the ECB refuses to join in the rescue package, the dollar will fall spreading even more gloom around the markets. Some very senior commentators in the UK are now discussing the potential for a collapse of the entire banking system in the West and elsewhere.

Jean-Michel Six, Chief Europe Economist at Standard and Poor’s says, “There is a monetary war going on. The ECB view is that the Fed is a victim of its own mistakes and should pay for its past crimes. Frankly, they don’t see why they should be cutting rates when inflation is accelerating.”

British inflation measured on the CPI index, which doesn’t include mortgage costs, has risen to 2.5pc this morning. However, core inflation is down to 1.2pc, indicating that, apart from headline price rises in food and energy, deflationary pressures may be the real enemy in the months ahead.

Bernard Connolly of AIG thinks the ECB is making the same mistakes that led to the Great Depression in the 1930s. “The ECB represents the 1930s element in world central banking right now. It is adding to the atmosphere of panic in the foreign exchange markets and ensuring the collapse of the credit bubble in southern Europe and Ireland will be even worse.”

How long before cries of “Cheese-eating surrender monkeys,” are heard once again?

Imagine Barack Obama becoming President of the U.S. and announcing he will use the Democrat-dominated Congress to pass a bill partially outlawing white men from getting jobs.

You can’t really, can you? It’s unthinkable. It would be political — and possibly physical — suicide.

Yet that is precisely what the British nasty party, Newish Labour, is considering doing. Its latest wheeze is to ban the indigenous population — minus women, of course — from getting jobs just when the icy winds of economic recession, and possibly worse, are blowing in from America.

Let’s just remind ourselves of what it’s like now out there in the real world :

The Bank of England is right now being deluged with demands by British banks to borrow £23.6 billion ($50bn) as lenders scramble to prop up their capital amid plunging global stock markets and asset values.

The Bank had offered just £5 billion ($10.4bn) to banks over a three-day period in an attempt to increase the flow of money between lenders.

Banks are running scared after the overnight news that the U.S. Federal Reserve has cut the discount rate by 0.25 percent and facilitated the fire sale of Bear Stearns to J.P. Morgan Chase at a fraction of its value.

Meanwhile, our government socially engineers while the City burns.

As subprime politicians in a subprime government, they should be sliced and diced and bundled into political instruments for sale to any institution that wants them.

Don’t hold your breath.

Postscript Our apologies for yet another political and economic article in this studiously non-political site. The news is getting so alarming now that it’s proving impossible to ignore the elephant in the broom cupboard — which is what the global financial situation now is.

The rest of the world may not know who, or what, Fannie Mae and Freddie Mac are, but Americans do. They are the financial institutions that guarantee 60 percent of the U.S. home loan market. Both are on the edge of meltdown.

The U.S. Federal Reserve Bank

They are also the leading players in a top-tier of lenders that control $11 trillion of mortgage lending. A collapse would trigger a catastrophe of unprecedented proportions across the world’s largest economy with swift knock-on effects around the globe.

What is emerging now is the greatest financial crisis since the Great Depression in the 1930s. If America’s huge mortage banks are no longer rock solid, nothing is safe anymore.

The Fed is pulling every string available to it to neutralize the toxic effects of the subprime disaster. It’s predicted to lower rates by another 75 basis points within days, and is now offering Treasury bonds in exchange for mortgage debt. By soaking up some of the poison, the central bank is temporarily providing a shoulder to lean on for jumpy bankers whose world is disintegrating around them.

Like the British mortgage bank, Northern Rock, Freddie and Fannie may have to be nationalized — or their dubious collateral underwritten by government agencies — to shore up the economy against plunging over the edge. And Bear Stearns is in serious trouble too.

All this makes the UK Chancellor of the Exchequer’s budget today rather small beer. And that’s just what we expect — taxes on beer and faux “green” measures to raise a little cash here and there.

The real action is in Washingtom, where the Fed is leading the charge against a U.S.-generated global meltdown of potentially epic proportions.

Bernard Connolly, Global Strategist at Banque AIG, believes Fed action won’t solve the problem of eroded of bank capital. “There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy. We should be thankful that we have people in charge who appreciate the gravity of the situation.”

True enough, but the “perfect storm” is gathering perfection by the hour.

Banks are pulling back from the industrial securitization of risk that has blown up so spectacularly in their faces.

So called collateralized debt obligations (CDOs) are the supermarket sausages of the financial system — nobody knows what’s in them, and most prefer not to.

In the old days, banks took the risk of lending money on themselves and ensured that borrowers would be able to pay it back over time. Securitization means that they can lend to any Tom, Dick or Harriet, package up the debts into large parcels of small slices from many borrowers, and sell them onto other banks and finance houses.

When house prices are rising fast, and rates are low (thanks to the Iraq war — see yesterday’s post), there will be no problem. How quickly the weather can change.

Now there’s a rush back to caution and traditional virtues — and not before time.

The Private Equity industry is currently holding its global jamboree in Germany. What a difference a year makes. Just months ago (pre-August 9, to be precise) the Private Equity barons were borrowing billions to take over all manner of companies, many blue-chip, and some national strategic giants. Now the sources of funds are drying up and the world has become a much more anxious place.

Not so long ago, securitization of talent was the goal for what HG Wells called “originative intellectual workers” — the kind of people who work from a laptop and a cell phone, hot-desking from place to place. They were advised to raise money on future earnings by selling shares in themselves. Specialized markets were to spring up, something like the London Stock Exchange’s AIM market, to flog these things to admirers with more money than sense.

I suppose if you turned into a Bill Gates or the Google guys your investors would be happy — but how many of us do?

The whole notion of securitization is targeted on bypassing the present reality in favour of an unknown future, using other people’s money — often their pension funds or insurance pots. In essence it’s no different from betting on racehorses.

Now the bubble has burst and cold realism has dawned, even for the godlings of private equity and their blood brothers, venture capitalists.

The beneficiaries will be China, and the sovereign wealth funds of Asia, including the Middle East. Western financial centres have permitted power to pass from settled democracies under the rule of law, to the potentates of totalitarian regimes whose oil deposits or cheap, exploited labour will soon allow to rule over us in many covert ways yet to be revealed.

And why? The abandonment of risk management in the cause of easy pickings.

Who will hold the banks to account?

Nobody — it’s too risky.