It was clear from the start that some form of nationalisation would inevitably end the Northern Rock saga. But yesterday's announcement, far from ending this fiasco, threatened to push the Gordon Brown even deeper in the hole he has dug. The purpose of nationalisation should not have been to continue “business as usual”, with Northern Rock continuing to lend more money and attract retail deposits, with the backing of Treasury guarantees. The purpose should have been to secure £100 billion of taxpayers' money and to prevent any further damage to the British financial system.

What the Chancellor should have announced are the politically difficult but financially sound decisions he will probably have to concede in the end anyway, under the pressure from the financial markets, from European regulations and from lawsuits by the shareholders of Northern Rock.

He should have announced that Northern Rock would be nationalised not to keep it in business, but to close it down; that the bank would stop lending new money or accepting new deposits as of tomorrow; that all the company's retail deposits would be shifted immediately to the National Savings system, while all the wholesale bonds would be replaced with Government gilts. The company would then be put into run-off, with the Treasury recouping its money gradually as existing borrowers repaid their mortgages over the years.

Nationalisation, in other words, made sense only as a necessary legal stepping-stone to the orderly liquidation that Northern Rock required as soon as it ran out of money in September.

To use nationalisation to keep the bank in business and its staff in state-subsidised employment would be a travesty of all the economic principles that “new” Labour has claimed to believe in. It would represent a grossly unfair distortion of Britain's banking business and would make a mockery of all the arguments Mr Brown has vociferously advanced in Brussels against state subsidies and protectionism elsewhere in Europe. Worst of all, the provision of £100 billion of state guarantees to a grossly mismanaged and insolvent mortgage bank would be a gross insult to the hundreds of thousands of workers in businesses from coal, steel and textiles to performance cars and advanced electronics whose jobs could have been saved with Government guarantees or “temporary” nationalisations costing one-tenth or even one-hundredth of the £100 billion that the Government is now devoting to just 6,000 jobs at Northern Rock.

Nobody in Parliament has yet drawn the obvious comparisons between the largesse being directed at Northern Rock and the tough love practised on far more important and famous British companies such as Rover, Leyland and GEC-Marconi. But this silence merely testifies to the political bafflement and financial confusion created by the disaster. Now that the financial uncertainties about who will own and control the company have been resolved, the question is why it should continue to stay in business with public support.

Why should a Government that has consistently refused to offer public funding for potentially viable commercial projects of real national importance - aerospace, public transport, nuclear power - now be spending tens of billions on supporting a bust mortgage bank? Is it because Britain is short of mortgage lenders, lacks employment opportunities for bankers or suffers a deficiency of financial innovation?

Even if politicians at Westminster are unwilling to ask such questions there can be no doubt that others will. It is quite likely that the European Commission will veto the business plans for Northern Rock unless these provide for a rapid rundown of both its lending and deposit-taking operations.

To judge by previous provisional and inchoate Treasury announcements, at least since Mr Darling became Chancellor, there can be no presumption that Government legal and financial “experts” have thoroughly checked the compatibility of yesterday's announcement with EU rules on state aid. And even in the unlikely event that the Commission does approve this unprecedented state subsidy, the Treasury's problems will only just have begun.

For if it turns out that the European Commission does permit Northern Rock to continue doing business as usual, collecting deposits and lending our money, while enjoying unlimited state support, it is almost certain that other banks will demand comparable treatment. Indeed, the entire British mortgage industry has already put forward proposals for the Treasury to guarantee on a new type of mortgage bonds - and given warning of a collapse in loans to homeowners if the Government does not oblige. And almost as ominous there will be Northern Rock's former shareholders demanding compensation in the courts.

If the Government tells the European Commission that Northern Rock was a fundamentally viable company, capable of long-term survival without state support, then the same argument will be used by Northern Rock shareholders to accuse the Government of unjust expropriation and of deliberately engineering the company's failure. And behind, in the long queue of potential litigants and self-avowed victims of Government incompetence and conniving will stand the citizens of Newcastle, deprived of their largest charitable institution, as well as the Northern Rock workers, who sooner or later will surely lose their jobs.

All in all, what Mr Darling announced yesterday was a financial and political disaster of almost unimaginable proportions. The Northern Rock saga did not end yesterday; the fiasco has only just started, with the Government now officially in charge .

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