PARIS, August 6, 2008 (AFP) - A year-long crisis is shaking the foundations of some of the world's mightiest financial bodies and economies, confounding policymakers who now confront an increasingly fragile and uncertain future.

The financial market turmoil that emerged last August as the US housing bubble burst has collided with a surge in energy and food prices along with a toxic combination in the United States and Europe of tepid growth and rising inflation.

The crisis erupted August 9, 2007 when French bank BNP suspended three of its funds, causing short-term credit makets to freeze up and prompting the European Central Bank to inject 95 billion euros into money markets.

Today, with consumer and business confidence crumbling, governments and central bankers are scrambling to confect measures -- official bailouts, tax rebates, lower interest rates, credit injections -- to snuff out a perplexing array of economic brush fires that include a threat of recession.

'This crisis is different -- a once or twice a century event deeply routed in fears of insolvency of major financial institutions,' former US Federal Reserve Chairman Alan Greenspan wrote in a column for the Financial Times on Tuesday.

While many economists maintain that the broader economy can -- with difficulty -- weather the storm on the markets, there is a strong fear that the global financial architecture remains vulnerable to more upheaval. Initial suggestions that emerging markets would be unscathed are giving way to evidence of global slowdown.

'One year later it's getting worse and worse,' said Kenneth Rogoff, a Harvard University professor a former chief economist at the International Monetary Fund.

'There's a lot more restructuring ahead in the financial sector and the global economy has a lot of adjustments to make to the commodities shock.'

In the past year fabled financial titans such as banks Merrill Lynch, JPMorgan Chase, Bear Stearns, UBS and Deutsche Bank, as well as the two US mortgage financing behemoths Fannie Mae and Freddie Mac, have all been stung. Some emergency recapitalisations have opened opportunities for investors from emerging markets.

The US housing meltdown was brought on by years of a cheap mortgage credit that left many homeowners facing huge debt they were unable to refinance when real estate prices began to fall.

A subsequent flood of foreclosures undermined the value of billions of dollars in mortgage-backed assets held by the banks, triggering staggering losses and writedowns on the their balance sheets.

The IMF has estimated that banks and financial institutions have written off more than 400 billion dollars on mortgage-related investments and have sustained losses of 945 billion dollars.

In such a climate, the banks in turn have grown markedly less willing to make loans among themselves and to businesses, prompting a worldwide squeeze on credit.

All this in a context of long-standing global imbalances and dollar weakness arising largely from US deficits that economists had long warned would unwind, possibly with vicious corrections.

The IMF in an assessment last month of financial stability, found that 'global financial markets continue to be fragile and indicators of systemic risk remain elevated.'

A crisis that began with a wave of mortgage foreclosures by subprime -- or high-risk -- US borrowers has spread to other forms of credit, it said.

Greenspan has said the bloodletting will end 'when home prices stabilise and with them the value of equity in homes supporting troubled mortgages.'

But Jaime Caruana, head of the IMF's financial markets department, said recently that with a continuing fall in prices 'a bottom for the US housing market is not yet visible.'

And the New York Times, in an ominous report on Monday, warned that another 'far larger' wave of defaults could be on the way, this time by people with 'prime' or good credit histories.

The paper quoted JPMorgan Chase chairman James Dimon as telling analysts he expected losses on JPMorgan prime loans to triple in the coming months and characterised the outlook as 'terrible.'

US policymakers, in particular Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, have so far responded with 'pump priming' measures, offering consumers 168 billion dollars in tax rebates, slashing interest rates and making Federal Reserve loans available to investment firms and banks.

The measures took concrete shape in an elaborate housing rescue plan signed at the end of July by President George W. Bush, described as the most sweeping housing legislation in decades.

The act provides 300 billion dollars in federal guarantees to help refinance troubled mortgages. It calls for government credit and equity injections in Fannie Mae and Freddie Mac, the two mortgage lenders that underpin much of the housing market, as well as 3.9 billion dollars to help local governments buy and rehabilitate foreclosed homes.

The Fed, the US central bank, has done its part by lowering its benchmark lending rate by 3.25 points between September and late April.

But for some economists the era of easy credit from 2003 onwards was the root of the problem.

'The subprime crisis is a result of massive US borrowing that kept interest rates artificially low in the United States,' Rogoff said,

'And that lulled people into thinking that there was no risk because credit was so freely available.'

Added Bank of America economist Holger Schmieding: 'If the aftermath of September 11 in the United States and the stock market problems worldwide, central banks were inclined to be accommodative.'

The Bank for International Settlements in Basel, the policy forum for central banking, concluded in its annual report that the main cause of the crisis was 'imprudent and excessive credit growth.'

The main lesson for central banks, it suggested, was that they should raise interest rates quickly when asset prices gave early warning of inflation to come.

Washington's response to the crisis, namely its willingness to rescue troubled financial institutions, has therefore unsettled economists who fear that bad habits could be perpetuated.

'The Fed and the US Treasury, by standing behind the big investment banks, are allowing them their highly risky activities at unrealistic interest rates,' Rogoff maintained.

'That has to end.'