An ironic justice that the banks are most affected by the current credit crisis, which was brought on largely by overpaid financial executives (as well as top corporate fatcats) appropriating virtually all of the economic growth of the past few years, while leaving the rest of society with stagnant wages, mollified by cheap and easy credit - an era whose bubble has now been pricked. (In Switzerland the phenomenon came to be known as the "Ospelisation" of the economy, after a well-known banker that heads the Swiss bank most exposed by the fall-out - after years in which his remuneration packet surged to an estimated multiple of 289 times that of the average Swiss employee).

Douglas, Basel, Switzerland

Western societies have flourished because of free market economics.
The two points of your article, the flow of influence to the East and the quid pro quo that governments might expect in return for their support of the banks ignore this truth.
The East will not overtake the West because their system of state control and lack of rule of law inherently weakens their prospects. Given enough time, cash will always flow to the best risk/reward ratio.
The West will always be a better long term investment when the alternative cannot be trusted.
The second point of state intervention in the running of the banks is counterproductive. In a free market economy people must be free to make their own decisions, even if they are wrong. The market will punish poor judgements and excessive pay. It is not the job of government.

Roger, Ullapool,

Hilarious post from Bobby Smith. Citizen Smith, the last proponent of class war and the politics of envy is alive and well and living in Surrey.

Dan, London,

There are interesting future implications from reliance on contributions from SWFs to help recapitalise western banking.

One risk could be that where new money closely matches discretionary disbursements such as bonuses, dividends and severance payments, the concept of such investment may be seen as a hidden Ponzi scheme.

Another possibility might be demand for protectionism and political tinkering in recipient countries in the future.

As many of those who have in the past pushed market operations (such as attempted commodity corners) beyond the comfort zone of the losers found out, when reward from market asymmetry is perceived to be excessive, the rules can be easily changed.

dr venables preller, Warminster, UK

In prosperous times money expands so borrowing becomes cheap and banks employ "creative" personnel on silly salaries to invent new "opportunities" such as Tiger economies or Emerging markets to obtain high interest rates to increase profits. Sub Prime lending plus CD's and endless derivatives is yet one more with out of control management a la Barings who don't care so long as profits appear to rise and their jobs are fail safe. Its a cycle that Governments must stop with laws to control risky lending, which in turn will mean no need of expensive "creative" employees. To save the day now borrowers must have the right to pay back loans over longer periods at no higher cost. If necessary Goverment must take over the loans which can be sold on as Government bonds. If banks then go bust or profitless so what? Government can then in future be assured in guaranteeing depositors in licensed banks which should be seen as utilities. Unlicensed banks can exist but with no depositor guarantees.

John Bentley, Loule , Portugal

Why should the Northern Rock shareholders lose every penny? Alistair Darling blocked Lloyds TSB from borrowing from the Bank of England in order to take over Northern Rock.

This would have prevented any run on the bank, and there would be no crisis at all.

Winston Smith, Foix, France

£38BIL minimum to prop up Northern Rock through nationalisation, and no guarantee that the teaxpayers will see much if any of their money again.

And you thought Black Wednesday was bad...

Joe, Sheffield, UK

Kaletsky is quite shameless. As recently as Monday he was telling us that the credit crisis was almost over. Today we get this prophecy of doom. Oh well, whatever happens, he'll be able to say that he warned us!

James Albert, St Albans,

It's time ALL bank and stockbroking employees joined the rest of the workforce and were paid a standard salary for doing their job. All these bonuses and gold handshakes should be banned by the government. How can banks be allowed to be supported by government funds and STILL pay bonuses? If the banks expect the government to bail them out in bad times with taxpayers money then they should be regulated by and controlled by the government. You never hear of their salaries being cut when they lose money.

George, Glasgow, UK

The time for regulation was five years ago when anyone with half a brain could see that the banks were a clueless bunch who fully believed that you could lend what they like to who you like because you could sell that debt on to some other clueless fool and then go and lend some more. These fools believed you could go on doing this for ever and ever and live happily ever after. Of course all these clowns dwell in a land called. Never Never Land.

Gordon Brown run a whole economy on the same principle so of course is the crowned king of Never Never Land and is now the leader of a whole Never Never Land government all of who have the same surname; Numpty Numpty

D Case, Newquay,

"marking a decisive shift in the centre of gravity of the world economy towards Asia after five centuries of financial, economic and therefore political dominance by Europe and America"

Irreversible !

Peter Vernunft, Berlin, Germany

Not necessarily. When I was needing a loan some time ago I saw that Northern Rock was offering terms that were significantly different from other contenders and I immediately thought, particularly in view of the name and all the circumstances, that they weren t going to last long. I am not going to crow at this point because it was so obviously inevitable. Thus, if anyone should be penalised it is the management of the company, given the limited control shareholders have, and the authorities. The Bank should be penalised, either for playing politics in this respect or for incompetence in failing in their duties of general oversight.
We are living in a complicated and deceitful world with Islam getting panned for revolutionary activities while Big Money makes use of Middle Eastern concentrations of oil money and designer hideaways for the infamous. We should be making an effort to identify and publicise the real responsibility, difficult as it may be.

Henry Percy, London, UK

The Chinese export goods to us. We don't export as much back, so by definition they get investment in UK assets. Being a dictatorship, the Chinese government then seizes those assets and will almost certainly waste them. So effectively we've got a free Chinese takeaway.

However that will only happen once.

Unless we want to see British and Chinese wages equalise, we must invest massively in education and training. And if we want a niche as the world's bank we must maintain the stability of the currency, which means reducing government spending. The only conclusion is that the NHS and social transfer payments need cutting back, education to be protected.

Malcolm McLean, Bradford, UK

I rarely read anything on this subject that brings a fresh perspective to the core macro issues. Congratulations, an excellent piece.

Anka, Sydney, Australia

It's time we abandonned the idea that super-size salaries are ever justified; there simply is not one brain so powerful to be worth 250 others.
Ok I agree that committee decisions are fraught but really two or more heads are greater than one.
Super heroes are rare so please lets argue for salaries that reflect human limitations.

jane, oxford, uk

Rather harsh - stuff the shareholders?

I remember watching the news when a woman explained why she was keeping her shares in The Rock. She had apparently been convinced by the Government and other 'experts' that this was the safe, sensible option.

She didn't look particularly well off - though you never can tell - and I had the sense she was not particularly financially educated.

I loved the piece and agree that this will be a turning point - not so long ago Donald Trump predicted a similar thing in one of his books. But the human tragedy in these events should make us slow to make snap decisions, after all, this poor lady may have just seen her life savings go up in smoke.

I wonder what Gordon's advice will be to her now?

joe, berwickshire , scotland

It is not a question of when the government buys Northern Rock. It essentially already has. When you loan a company more money than they are worth you bought it. You just don't have the luXury?? of running it yet. The government got all the risk of loss and none of the control or up-side (not sure there is any). Now taking ownership is tricky since if the stockholders get nothing it will look like confiscation and if they get a fair price (God only knows what that might be, Ibut I for one thing zero sounds fair) then British people get screwed even more. As they say in the Guinness adverts in the US BRILLIANT!

Mark, Washington, DC/USA

It is about time someone said this. The greed of Big Finance created the problem. Let it sort itself out. Those who "shorted" Northern Rock made enough on the way down. Don't let them profit on the way up. Do not bail out Northern Rock.

John Cleeve, Abu Dhabi,

The manufacturing company which I worked for became insolvent and went into administration four years ago. The Government then paid the legal minimum redundancy payments to those who lost their jobs.

Similarly, the Government (i.e. the taxpayer !) should only refund depositors when a bank is in administration.

Rob, Wirral, UK

We don't have a free market anymore- we have total anarchy- that's what greed and avarice does to responsibility, and freedom without reponsibility is anarchy. No wonder everything is so out of whack that no one knows what's going to happen from day to day. How ironic that it's the tax dollars of the unwashed masses who are so despised for their relative poverty who will end up bailing out the arrogant and incompetant engineers of this economic mess.

Deidra Baker, Dundee, Scotland

Yes the GDP's of China and India will inevitably grow as they industrialise whilst those of Europe will either stay the same or grow just a little or even go down a bit if the populations fall.

So what. It is quality of life that matters most and in any case behind the scenes the money changers remain the same and they are the ones with the real power and this will remain so until we take it away from them.

Alan Heaton, Frankfurt, Germany

Was there a similar course of events as Holland ceased to be the top economic power & gave way to Britain?

Elizabeth, Cambridge, Britain

A good deal of the sub-prime catastrophe could have been averted if the American people had not voted in a sub-prime President. This financially illiterate - (and obviously liguistically illiterate) - President has been at the mercy of sophisticated (for America) shysters, like Dick and Rummy , who have shaken the poor clown down until his teeth rattle. Immense wealth has been created by illegal and immoral wars and the wealth of the USA been diverted into private pockets. Such has been the focus on 'the war on terror' which has produced vast profits for those able to exploit it, that the problems within the country have been ignored. Personal tragedies abound now in the US. None of them to the golden boys of Washington, who, like the appalling Blair here, will prosper and sneer at the gullibility of the fools who not only stood by and let them get away with, actually voted them in a second time to get away with it again. The UK and the USA have what they deserve.They voted for it.

eric campbell, harrogate, uk

Admittedly I (like many others) suffer from a jealousy of the city-bankers and financiers-probably because I couldn't earn the amount of money they make in a year if I worked like a slave for the rest of my life! I appreciate that most of their activities are money generating and good for the economy and it is an extremely stressfull and pressurized career which probably burns you out in under 6 years! One thing that comes out of the current situation though must be the need for financial papers bought and sold that don't need a PhD in quantum physics (or Nostradamus-style psychic abilities) to understand, no more products such as repackaged "NINJA"-loans chopped and diced and given a false risk rating by some dodgy computer algorithm then sold rampantly everywhere! Yet I fear where greed rules there's little in the way or restraint, and even when this has blown over (eventually) something similar will recur only under a different technical description.

Steve, Leeds, West Yorkshire

This government is so politicised it makes them stupid .

If they had stuck to simple basics and let Northern Rock go to the wall it would have been a 2 minute wonder and largely over by now .
The loans book would have been old off quite easily ; they are mainly high quality loans .
The depositors would not have lost any money even without that panicky open ended government guarantee .

The shareholders would have been left with nothing but then that is the risk of shareholders always .

Northern Rock could possibly have been bought off the receivers and relaunched as a building society which would have been politically nice .

As it is Brown's government is about to increase British national debt by at least £57 billion and the saga will just go on and on for years .

The penalty for Labour's political deviousness is absurdly high and completely unecessary .

Jefford, London , England. ,

Please think more critically commentators: in most banks, all the other product lines other than credit derviatives have done very well, often their best year ever. 95% of the business lines in the banks are super profitable but the huge leveraged losses on credits derivs outweigh. If the bank's wish to keep their franchises then they need the business assets, i.e people, to be able to carry on making money in all the areas but the 5% that are now dead. Otherwise the banks that don't have huge exposures (non bulge bracket banks) will get the people. Schoolboy economics doesn't work.

ThinkClearlyPlease, London, UK

Could someone explain how lis it that large bonuses are being paid to financiers and bankers at the same time as Western banks  are severely short of capital and have made what seem to be major misjudgements about the global economics. Or is it just a machiavellian  view of existence that really has no moral content at all but a clever ability to manipulate the system.for short-term gain. Or is this all a storm in a teacup which we will have forgotten about in 12 months time - but I think not.

Brian Lewis, Manila, Philippines

The shift in power is to be celebrated! All praise to Allah for starting the process for Americans to permanently withdraw from global affairs. Others will be far better and humble stewards.

Otto, Los Angeles, USA

Market capitalism? These banks are running their own version of it. Their irresponsibility and arrogance defies belief.

I whole-heartily agree with your last paragraph. If any good can come of this, governments will hold them accountable in exchange for their 'right' to operate in a market where they reap the benefits, while the taxpayer carries the risk.

Mary Catherine, Elmhurst, US/IL

When the Top line workers make 200 times the bottom rate as opposed to ten or fifteen this places such firms at a marked disadvantage. We seek lower wages wherever we find them how is it that this principle is not universal?
I suggest that one tax that should be cut by 90% is the CEO tax that we pay for the priviledge of being told what to do by nicely dressed people with fine accents and slightly impaired vision. I understand their sense that it seems unfair that they should pay when so many others got off scott free, but if we understand from the beginning that there are rules perhaps the security will be some sort of compensation.

glenn schaefer, holbrook, usa

In my opinion, the whole Northern Rock issue highlights the pitfalls of government/central bank intervention.

If we go back one stage and say Northern Rock was allowed to have gone to the wall (like any other business when it becomes insolvent).

Would there be meltdown in the Global/UK economy? Maybe in the short term, then the natural order of the market should be restored with a sell off of the business.

Would the government/BoE loose credibility for doing nothing? Again in short term possibly but then the Bank wouldn't have £25bn tied in to a dog.

Politically the govt would suffer especially in the North where there is strong support and jobs at stake. However why should the govt get involved? Should they now feel it encumbent to bail out every failing business? How about the high st shop down the road that is loosing out to the new out of town supermarket? What's the difference? The business model failed in both cases to survive.

TP, Egham, UK

Wealth comes from industry, industry needs energy. Energy for people (in the form of food) is pretty-well universally available in rich western countries. Unfortunately, other sources of energy, to drive factories and offices, isn't. We used it all up long ago.
The govermnments of the west are a little late in uncorking the nuclear bottle again, but at least we now know the real reason for these decisions - it's to keep us from being bought over by the very oil/gas-rich regimes that our politicians profess not to trust.
The economic bankruptcy of World War 2 placed Europe under US influence for years. What happens in the next phase, when the economic stick is wielded by the non-democratic regimes of Asia and the middle east?

KR, Stockport,

Let them go under like any other badly run business. Shareholding is a gamble - some you win, some you lose. Imagine, a bank run by this government!

Frederick, London, UK

Are we progressing back to rhe days when the safest place for one's money was under one's pillow?

Michael Blatchford, Bristol, uk

How many decades ago did Sumitomo take a big stake in Goldman Sachs ?

It is good if the Casino Capitalism Banks become owned by Sovereign States and then we can get away from confusing them with real economic output. The biggest curse in Britain is that it is more dependent on banking than Switzerland, and a population growing as fast as in Britain cannot sustain itself as a rentier economy.

The world's largest exporter has a much smaller financial sector, and no major economy is so dependent upon financial transactions as is Britain

TomTom, Leeds, England

My partial solution is to tie the payment of incentives to the time span of the transaction that yielded them. So someone who made 1/4 % on £100 million of loans with an average 25 year timespan would, instead of getting £250,000 in the first year, get £10,000 per annum for twenty-five years, with the proviso that if some of the loans failed the payments would be reduced. The matching of costs and benefits is a fundamental accounting principle.

Mary, London,

Sorry Mr K - I don't see that banks or other financial institutions should receive taxpayers help any more than the local cornershop does.

Savers already enjoy a safety net guarantee up to a reasonable amount and enjoy higher interest rate returns not paid to those who "invest" in 100% guaranteed National Savings products. Those rates reflect the risk involved.

It is time that all savers and investors worldwide realised that risk is part of the market - be it in a bank or a massage parlour.

If Northern Rock had been called Southern Jelly and based in Surrey or Essex I doubt very much that taxpayers funds would have been risked. No votes there.

Let the market decide and take the highs and falls that go with it..

Rob Green, Braintree, England

The complexity of the prescription is highlighted by the logical flaw in your final paragraph, pointed out by Mr Hood.

Pierre Bernardi, Paris, France

Borrowing money for a failing business to pay shareholders in order to keep them sweet so they allow you to take a couple of hundred thousand pounds in bonus payments for your failure. Sounds like a dream job? It appears to be standard executive practice these days. It should be a crime.

David Thijm, Stourbridge, UK

You guys just don't get it, do yah? We need the bucks from the
East to pay our best dealers their bonuses. Who give a toss about the bottom line - we always come back winners. We gotta keep our dealers - if they go to the competition, we could be in deep. So we got a little blip in our scenario? So what? We keep the best guys - we make the big profits next year.

john problem, winchester, uk

A really rather scary scenario. It would seem that a very high price will have to be paid for the various financial excesses of these recent years. I'm wondering if the "Japanese-style decade of depression" is not becoming an increasingly distinct possibility. Who remembers the Nikkei index at +-40,000? And the subsequent downward crunch to about 9,000? It's all relatively recent history.

The Japanese, through no fault of their own, have helped to export their stockmarket crash via the 0% yen interest rate policy. Resulting in crazy "distortions" like the carry trade. The ultimate "free lunch", if ever there were one. Other sources of "easy" money have contrived to inflate all kinds of asset values and i'm left wondering what sort of price will have to be paid.

Given that we're witnessing a shift in power towards the far east, will it be prudent (to use someone's famous word) to invest in those particular stockmarkets? Or are they too export-oriented and likely to suffer ?

Peter Koeb, Geneva, Switzerland

Bonuses and huge payoffs for culpable directors and managers of the banks ? There should be no question of such "benefits", those culpable should be summarily dismissed without compensation. Don't hold your breath however : the struggle to get the books in order will almost inevitably be a reduction of more junior staff (still fewer tellers at the counter) and another attempt to impose bank charges on customers in credit.
I wonder if there is truth in the widespread belief that the demise of the traditional branch manager (who actually knew his customers and was knowledgeable as to their creditworthiness)
is the starting point for the banks' curent roubles ?

Lewis Thomas, High Wycombe, Bucks. UK

Or maybve we could just bring back the gold standard. The market highs aren't as high, but nor would you get this ludicrous situation either.

Ted Cowan, london, uk

The East and Middle East are now investing heavily in the West and particularly in financial institutions where their help is so desperately needed.

This is a way for them to unwind very dangerous dollar positions. Who wants large quantities of rapidly depreciating dollars these days? They can not be sold on the open market, as this would speed up the fall in value of the dollar and damage their remaining dollar holdings. The best way to get rid of those dollars is to buy assets in the West.

This seems to be working well for both parties at the moment, but this could be the beginning of the end for the dollar as the global currency. If this starts to happen then it will become much more obvious that the US is the bankrupt nation that it really is.

In ten years time maybe China and Russia (with its energy reserves) will be the new super powers.

Keith, Ashford,

It looks to me like the Govt is in a cleft stick of it own making; Ministers have said that N Rock is essentially sound; that it's just a liquidity issue. While European Law says you cannot nationalise without full compensation for lost property, so the Govt will have to pay shareholders the full whack if they nationalise. That's a lot of money and the hedge funds will surely take them to court if they don't cough up, because the ministers can be held to what they said, even if it was tosh aimed at joe publc.

Simon, Basingstoke,

"banking is different from other industries because depositors' savings must be protected"

Could this not be achieved by banks being obliged to take out insurance on deposits on behalf of their customers? If the premiums reflected risk, it might help to constrain irresponsible lending.

HJ, Reading,

Oil revenue was wasted in the UK throughout the 80s as shown by the excellent doumentary by will hutton- 'wasted windfall' shown in the 90s where the conservative simply used this great bounty to transfer the uk from a manufacturing nation to a service one. Many cynics esp. in the home counties of england dismiss the importance of oil. just go to norway (as i do regularly) and see what it has done for their prosperity and society. As for manufacturing everything i see in the shops is without exception either made in europe or beyond - but not here. The government of the uk has blown it.

allan, Aberdeen,

It is very important that the huge salaries and bonus payments made to the bankers are maintained. Without this the sales of champagne, second homes, private education, cocaine, porsches, diamonds and other life essentials may well drop. This will obvioulsy have a large effect on the 'trickle down' aspect of the world's economies and may result in.......a much fairer society with a smaller gap between 'them and us'.
If there is to be any silver lining in this current mess (caused largely by those bankers themselves) then a radical rethink is needed in how governments allow the banks to reward their staff, and this can only be achieved by significantly increasing the banks and their staffs contribution to the tax gathered by government. It is entirely reasonable to tax such goods as diamonds and porsches at three times current VAT levels. The result? The poor old bankers would have to make the car last 2 years, not one, and society could use the money raised to help the poor. Radical!

Bobby Smith, Surrey, UK,

Shareholders of Northern Rock to loose every penny? But I thought that shareholders are entitled to a guaranteed return and that risk is carried by tax-payers?

John Hood, Bristol, UK

There are many taxpayers who have benefitted from Northern Rock's profligacy; the housing boom was fuelled by excess lending. People who overextended themselves, but reaped a huge capital gain, should have no complaints, if they have to give a little back. But what of those who lived within their means, maybe deferred the purchase of a house or preferred to rent? What quid pro quo for them?

Phil, Bishop's Stortford,

Abu Dhabi, Kuwait, Dubai, Saudi Arabia, China, Singapore and South Korea are all wealthy economies because they either benefited from the high oil price or our consumer greed.

The UK wasted it's oil/gas dividend and will be left with nothing to show for it. Norway will - through its oil fund - remain a wealthy nation as will the Middle Eastern oil producers. The City insisted on higher dividends forcing manufacturing offshore to China and S Korea and is now even investing there instead of here.

We reap what we have sown.. Simple as that.

DickW, Aberdeenshire, Scotland

But...but...but...Mr AK, for months you've been telling us that all is rosy in the garden!

Bruce Robertson, Brighton, UK

The Citibank dividend was surely agreed with their new friends and Morgan Stanley's bonuses too, or was there a failure in advice and due diligence?
But the banks have been doing exactly what Greenspan & Brown wanted or the banks would have been informed, interest rates raised sooner and monetary growth trimmed.

The banks have supported growth in the consumer led economies while Greenspan and Brown weren't shy in telling us how clever they were.

Now we will have to bail out these two failures.

If we have to have a depression that might solve a number of problems in the social-economy as wel as which Government is in power.

DM, Eastbourne,