SHARE prices on Bursa Malaysia continued to tumble last week, with the benchmark Kuala Lumpur Composite Index (KLCI) plunging to a two-year low as banking stocks suffered heavy losses by late week on fears the US credit crisis will spread globally. The KLCI lost 86.5 points, or 8.5 per cent last week to settle at 934.01, with daily average trading volume rising to 550.5 million shares from 324.6 million shares the previous week.

The world is clearly facing a crisis of confidence as banks refuse to lend to each other despite massive liquidity injections by central banks, bailouts and interest rate cuts to keep the global financial markets and economies afloat. Fears of counterparty risk and more banks collapsing if the global economy plunges into a prolonged recession are the key factors for such irrational behaviour. This lack of confidence in the financial system is unprecedented and the impact of whatever measures taken so far has disappeared into a black hole.

As an ongoing damage control exercise, the leaders of the Group of Seven (G7) economies vowed to take steps to unfreeze credit and money markets but stopped short of announcing any new concrete measures. This is a major disappointment as markets were anticipating some concrete plans akin to the UK's plan to guarantee loans between banks.

In times like this drastic coordinated measures are needed until markets return to normalcy and these actions need not be in the spirit of laissez-fare. Meanwhile, there is nothing wrong if central banks around the globe imitate the UK's move in guaranteeing loans between banks.

Locally, although the worries and panic in equity market have not trickled into the real economy, the central bank should come forward to guarantee bank deposits as a pre-emptive measure to avert bank runs. The government should be ready to extend such preventive measures by even setting up a rescue fund to purchase good stocks if they trade at distressed valuation as the negative wealth effect from a continued selldown will affect the broader economy. It should also introduce more fiscal stimulus to sustain domestic demand and ensure resources are channelled towards activities that have higher multiplier effect and are used in most efficient way.

The outlook for equity market this week still hinges on externalities. To begin with, the 35.4 per cent year-to-date correction in KLCI is the second highest in this region after South Korea's Kospi(-34.6 per cent). Meanwhile, the regional markets have corrected between 39 and 48 per cent, and the upper range widens to 64 per cent if we include China.