The nationalisation of Fannie Mae (NYSE:FNM) and Freddie Mac, and the bankruptcy of Lehman Brothers (NYSE:LEH) take us into the most dangerous financial territory since the 1930s. Of course there are similarities to earlier crises. The attempts by Fannie and Freddie to trade their way out of problems on an outrageously thin capital base are redolent of the savings and loan fiasco of the 1980s. As in the mid-1970s and the early 1990s, property has been at the heart of the maelstrom, with bankers and regulators in the US pinning their colours to the fabulous notion that national house prices never fall.

The financial markets' categorical imperatives - greed and fear - played their part in creating what proved to be the biggest credit and housing market bubbles in history. But this time some things are genuinely different.

Such is the scale of financial imbalances that the global economy is more vulnerable to financial stress than at any time since the inter-war period. Any interruption in the financing of a US current account deficit of some 5 per cent of gross domestic product threatens a sharp reduction in global economic growth. The seizure in the markets for securitised financial products, which played a central role in recycling the surplus savings of Asia and the petro economies, came close to pulling off that malign trick. Had the US government not come to the rescue of Fannie and Freddie, the worst might have happened.

The extent of the loss of trust in the banking system is likewise extraordinary, as is the global nature of bank liabilities. Lehman's creditors include leading banks in the UK, continental Europe and Japan. Equally striking is the diversity of systemic risk, which cuts across historic functional boundaries. Institutions that pose potential systemic threats include not only hedge funds (remember Long-Term Capital Management's near-collapse in 1998) but also insurance group AIG, which is desperately short of capital.

Part of what makes this upheaval so dangerous is the much larger role investment banks have played in the system than in the late 1980s, when Drexel Burnham Lambert collapsed. Without access to retail deposits, their funding base is more volatile. Their assets tend to be more risky than those of the commercial banks and yet they engage in a huge volume of transactions on the slenderest of capital bases. Fluctuations in their balance sheets contribute greatly to the pro-cyclicality of financial markets.

It seems inconceivable that regulators will in future permit independent investment banks to operate with such a narrow capital cushion. That, along with the collapse of Lehman and Bank of America's takeover of Merrill Lynch, has given rise to justifiable speculation that the investment banks' business model is no longer viable. What makes the management of this crisis so difficult is the opacity of the modern financial system. So much business in new markets has been screen-based, not on organised exchanges. Property has been packaged into obfuscating structured products. It is a truism that regulators and supervisors are always a step behind practitioners in understanding financial innovation. In the current debacle they have been several steps behind. Opacity is partly to blame. Even bank boards and top executives have been woefully ignorant about the financial plumbing of their organisations.

Lack of transparency was admittedly a feature of banking crises in the 19th century, when most financial business was conducted through partnerships and few financial data were available on individual bank balance sheets. But the 19th century was not plagued by the unprecedented complexity that afflicts today's derivatives markets.

One constant in financial crises is moral hazard, whereby repeated bail-outs encourage excessive risk-taking. The high-risk decision to let Lehman go to the wall was a well intentioned attempt to address this endemic problem. The snag is that the consolidation taking place in the financial system is leading to more concentration: a smaller number of much bigger institutions that are too big to fail. Impaling the moral hazard dragon will be an unremitting struggle.

John Plender is an FT columnist and chairman of Quintain plc

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