To judge by the number of worried questions I keep getting from friends and readers, there is still plenty of interest in the apparent financial crisis that has been dominating the business news since early August. One aspect that has not received much coverage so far is its impact on the British economy and the London housing market – and the political implications of those for Gordon Brown.

The latest twist, which focused my attention on the local repercussions of this international saga, occurred on Wednesday, when Mervyn King, the Governor of the Bank of England, sent an open letter to the House of Commons Treasury Committee. Mr King’s letter, characteristically lucid and dispassionate in its intellectual analysis of the crisis, had a more controversial subtext, which the Financial Times reflected in the opening sentence of its front-page report: “A clear divide between the world’s leading central banks over how best to respond to the credit squeeze emerged yesterday after Mervyn King warned that efforts by his counterparts in America and Europe to shore up the financial system could sow the seeds of a future financial crisis.”

In the collegial and understated world of international central banking, Mr King’s letter represented an almost unprecedented public critique of the European Central Bank and US Federal Reserve Board for having poured hundreds of billions of dollars and euros into their banking systems since early August to try to ameliorate the consequences of the financial blunders.

After weeks of intense lobbying for comparable action in London, Mr King’s message was defiant and blunt: whatever special treatment financiers may extract from New York or Frankfurt, the Bank of England would be no soft touch. It would stick to its normal procedures and would leave private lenders and borrowers to clear up the mess they had created. Unless the safety of money deposited in the banking system itself were threatened – and so far, there hasn’t been the slightest evidence of any such threat – Britain would ensure that the costs of the present crisis fell squarely on the shoulders of bankers and their shareholders, who could expect no help from the public purse.

There is much to be said for this tough approach from both a political and economic standpoint. As Mr King argued in his letter, the world economy will become less efficient in the long run if governments provide “ex post insurance to institutions that engage in risky or reckless lending”. But rather than debate the fine points of economy theory and business morality that US and European central bankers can present, with almost equal conviction, to justify their more supportive approach to troubled banks, I want to look at two potential economic consequences of the summer financial crisis.

The first is a general slowdown in economic growth resulting from tighter lending conditions, especially for mortgages. This slowdown was going to happen anyway because the Bank of England was increasing its base rates, but it will be intensified by the financial pressures faced by British banks.

The second is narrower, but will probably turn out to be more important. This is the decline in bank profits and shrinkage of financial bonuses and employment that will inevitably result even if the world economy stays on a decent growth path, which I think it will.

Britain is far more dependent on finance and related businesses than any other advanced economy. The implication is that Britain will probably suffer more than any other country, including America, from a combination of tougher lending conditions, lower bank profits and fewer jobs for highflying financiers.

The impact on the London economy is likely to be particularly pronounced. According to the Centre for Economics and Business Research (CEBR), wholesale finance and related activities have been adding 10,000 jobs annually to the 340,000 highly paid professional financiers, lawyers and accountants who between them account for about 20 per cent of the gross value added in the London economy.

But according to Jonathan Said, of CEBR, instead of this annual growth in jobs that London has been able to take for granted since 2002, the year ahead will probably bring a reduction of 5,000. To make matters worse, the incomes of these well paid workers are likely to decline sharply. Mr Said’s best guess is that the bonuses of £6.6 billion paid to London financiers last year will shrink by about 15 per cent. My view is that the figures on both employment and incomes will turn out to be considerably worse than these estimates. This is because many of the complex international deals hit hardest by the present shakeout are ones in which London specialises. The damage to financial employment and incomes in the capital is likely to be at least as severe as it was in 2001 and perhaps a lot worse.

The upshot is that London, which in the past few years has become the world’s richest city largely through its dominance in international finance, is about to suffer a big knock. And this setback will be even more severe, at least in the short term, if Britain takes a tougher line against financial bail-outs than the authorities in Europe and the US.

This does not mean that the Bank of England is wrong to oppose bank bail-outs or that London’s leading position in international finance will be lost in the long term. It does mean, however, that having been unremittingly bullish about the British economy and property market for most of the past 15 years, apart from a brief wobble in the summer of 2004, I now believe that house prices are likely to fall, especially in the highest priced areas in the centre of London.

With around half the marginal seats in the country concentrated in and around London, and the Treasury’s tax revenues eroded by vanishing bonuses and declining bank profits, this also means that 2008 will not be a good year for Gordon Brown to try his luck with the voters.

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