The subprime market is rapidly moving into meltdown. Since December 2006, at least 24 mortgage lenders have hit the wall. Nowhere is the sense of panic more evident than in the cost of default insurance on subprime loans. In just a few short weeks, it has as gone from 0.5 percent over LIBOR to 12 percent.

Like in all financial panics, institutions are slow to react, and then move with lightening speed. As always, the credit rating agencies are behind the curve. However, once financial distress becomes obvious, they start downgrading. Standard and Poors has just placed 11 loan packages worth $146m on watch for a possible downgrade.The larger subprime lenders are desperately over-provisioning for bad loans. The British bank HSBC has set aside $10.5bn (£5.4bn) to cover bad loans in the US.

However, it is the Fed that is last to react. Complacency still rules. As Governor Susan Schmidt Bies casually said "I don't think there'll be a large impact on prime mortgages from the sub-prime market,"

Lets wait and see.