WHEN THINGS are "going forward", we are all going up a long escalator in a plush shopping centre. But when things go bad we are all packed into a descending elevator.

We all got into the elevator a few weeks ago. We knew it was going down and we expected it to stop at ground level. But it hasn't stopped. It has kept descending. Faster and faster. We all feel our stomachs move up through our bodies as we fall and are collectively gripped by fear.

The out-of-control lift metaphor is the stuff of cheap horror films, but it is used by Austin Hughes, economist with IIB Bank, to describe the current freefall in global financial markets.

A contagion of fear has gripped the financial world, paralysing the markets and plunging the value of some of the world's biggest banks and corporations to depths not seen for decades. People actually rioted in Hong Kong on Wednesday as they clamoured to get money out of banks following heavy losses at the city's Hang Seng index.

Iceland nearly went bust a few days ago – not the shop that sells frozen fish fingers, the country.

With riots on the streets of otherwise peaceful cities and sovereign countries teetering on the brink, you could be forgiven for thinking that we have all stepped onto the set of an apocalyptic Hollywood blockbuster.

'The Fear Factor' has taken hold and it keeps reproducing itself across international boundaries with no sign of abating.

"There are different levels of fear," says Austin Hughes. "One is within the markets themselves where you probably have irrational despondency. Previously there was 'irrational exuberance' on the markets, now there is an excessive sense of scepticism and you get irrational despondency.

"Previous economic downturns tended to be somewhere else – for example they related to the dotcom sector or the Asian banks. There were parts of the financial universe that had limited spill-over. People tended to think that financial markets were a law apart but now they are equally vulnerable, as we see in the current climate.

"The reality is that we have seen a downturn that was entirely unanticipated in terms of its scale across institutions."

IIB bank compiles a monthly consumer sentiment index with the Economic and Social Research Institute (ESRI). Seán Sixpack's sentiments in that index are usually from a "different universe" to the concerns that the financial market creates.

Now, with falling house prices, rising food and fuel prices and less job security, the average consumer has the same worries as a trader on the market floor.

"They have had a similar experience to the markets," observes Hughes. "There used to be a time when Desperate Housewives was watched. Now Joe Average is becoming even more concerned and he is tuning in to see 'Desperate Markets' every evening. You have moved from a situation of extreme confidence to one of extreme fear and doubt. The environment in the financial markets has seen central banks seem like superheroes coming to the rescue."

By close of business on Friday, stock markets across Europe had fallen after a day of dramatic share price falls in Asia. It was the worst day on the markets since 1987 – another 'Black Friday'.

That evening, David Buik of BGC Partners in London said, "It's a banking problem, it's a credit crisis problem and it's a complete loss of confidence worldwide."

So what do we do next? Politicians around the world are asking themselves that very question. The two Brians have tried to save Irish banking with the government's bank guarantee scheme. This week they will reveal the terms and conditions of that scheme in the Dáil. That will be after the budget on Tuesday.

With world markets not just in turmoil but in a state of panic-stricken insanity and fear fuelling hysterical behaviour, it is a far from ideal background in which to deliver one of the harshest budgets in decades.

As US markets took a hammering on Friday, President George Bush came out into the White House rose garden and said, "The United States government is acting; we will continue to act to resolve this crisis and restore stability to our markets. We can solve this crisis and we will."

When an English premier league soccer club's board come out and back their manager with a vote of confidence, that is inevitably followed by the manager getting sacked shortly afterwards. As Bush pales into insignificance in the final weeks of a disastrous second term as the most powerful man in the world, his speech on Friday did not exactly reverse the confidence and fear ratio.

"The only way the credit crunch will be fixed is to continue with the existing bandage measures but also bring in a system on international regulation," says Dr Charles Larkin of Trinity College's department of economics. "It's clear from what has happened in recent weeks that banking does not stop at national borders. It's a global issue which needs global solutions."

In the current atmosphere of fear there may be one positive outcome to the current crisis when it is over, whenever that may be. Taxpayers will have a say in the way their banks behave and the autonomous powers held by unaccountable bankers will have to be diluted.

"People are very worried about the value of bank assets. We are finding out a lot about bank activities," says Dr John Cotter, director of the centre for financial markets at UCD. "But people are now fearful because they are not happy with their banks' valuations and assets. This is propelling ever greater fear."

Cotter says we are asking more and more questions about the banks because there is still great uncertainty about their solvency.

"Governments such as the Irish, US and UK governments have come in and intervened but there is still uncertainty. They came and gave these guarantees as they were trying to remove uncertainty but they have not removed it because we are getting more and more negative information about the banks."

Cotter believes people will draw confidence from the steps taken by governments but the pace of the crisis is such that it is hard to predict when the fear will dissipate and confidence will return.

"Information is coming around faster so we analyse it faster and respond faster. But even though it is much more readily available and seized upon it isn't giving us a clear solution to the questions we are asking. As a result the crises tend to be bigger and have a longer impact because the information coming out still requires further questions to be answered."

Cotter recalls that, after 11 September 2001, banks in the US relaxed lending rules and that went on for four or five years. It was 2003 and 2004 when subprime lending really kicked off.

"That is a long time-frame, so to resolve those negative impacts on the real economy just won't happen overnight," he says. "At the moment things are changing all the time. You could ask an analyst for his opinion this morning and it will have changed later that day. Their opinions are changing from a negative sentiment to a different type of negative sentiment."

Dr Brett Steenbarger has been directly involved in financial markets since the late 1970s. He currently consults with Wall Street traders. A clinical psychologist, he has written books about trading, including The Psychology of Trading in 2003. He believes people have every reason to be fearful.

"In a nutshell, I do not see this as irrational fear. I see it as a realistic response to a very real breakdown of world credit markets," he says.

Professor Philip Lane, a macroeconomics expert at Trinity College Dublin, has studied financial crises over the centuries and says that, in many ways, this one is no different.

"In general terms this is a classic crisis pattern. We have seen it before in history when you look back to the South Sea Bubble in 1720. Even in the last 20 years we have had crisis in Mexico in 1994, in Asia in 1997 and in Russia in 1998. This is a textbook scenario and the financial markets are characterised by herd behaviour. It is individually rational for each trader to say they don't trust another bank but collectively it leads to the crisis with everyone trying to sell bank shares at the same time.

"The whole point of banking is maturity transformation – to acquire liquid liabilities and invest them for the long term. This relies on people not taking out their deposits at the one time. That works most of the time but it is prone to panic if all depositors or lenders want their money back at the same time.

"The problem over the last 10 years has been globalisation, where you have global banks and a global financial system with regulators in each individual country. Major organisations such as the Bank of International Settlements (BIS) have been saying that what is happening is not a surprise; it is just the sheer intensity and scale of what is happening that is surprising."

Even though Lane refers to textbook scenarios, the current situation is very different, mainly because of modern communications and technology.

"In Hong Kong, there was a crisis in a bank recently. The panic was spread by text message. A text message saying 'This bank is going to fail, get your money out quickly' spread rapidly and sent the bank into crisis."

Lane argues that, while modern technology such as mobile phones and the internet have accentuated the speed at which markets dive, the fundamentals stay the same. The markets are being driven by fear. So it is all about reversing the fear and confidence ratio in the markets.

"The end depends on the response of the governments around the world. Investors need to have confidence. The key is to get confidence back. What the Irish government did was to stabilise the banks and stop runs on the Irish banks. The general principle is that the banks need to get the bad news out quickly and confidence will return. The intensity of the panic in the last week will subside but the general bad news situation is not going to go away any time soon."

It will take very strong stomachs to withstand that elevator ride as it continues its rapid descent.