So the impossible has become inevitable - and even faster than I expected. Two days ago I wrote on this page that the global financial crisis had suddenly reached the point where the US and British governments would have to eat all their rhetoric about “punishing greedy bankers” and start intervening in stock markets to support the value of bank shares.

The only alternative was nationalising every leading bank and insurance company in America and Britain. A government-backed bailout of all leading banks on both sides of the Atlantic has now duly begun.

The violent zig-zags of the past two weeks - not just in financial markets, but also in government policies and economic expectations - have left everyone dizzy. Not least readers of these pages, many of whom have complained about the way I lurched from optimism to pessimism in analysing the past few week's events. To try to cut a path through all this confusion - and to explain another lurch in my views, back towards optimism - I will raise five questions and try to give fairly straightforward answers.

What suddenly transformed the familiar credit crunch, quietly grinding away in the background of the world economy since last August, into a catastrophic crisis?

The financial diseases caused by lax mortgage lending and misconceived financial trading have been around for over a year. But two weeks ago they suddenly moved from chronic to critical.

What triggered this change was the US Government's “rescue” of the Fannie Mae and Freddie Mac mortgage companies. This rescue was actually more of an expropriation. Fannie and Freddie shareholders had their investments suddenly and unexpectedly wiped out by Henry Paulson, the US Treasury Secretary, who was intent on avoiding accusations of using taxpayer money to bail out banks. The “rescue” signalled to shareholders in other US banks that they, too, would lose everything if they ever required government help.

The debacle also encouraged short-sellers - stock market speculators who profit from falling share prices - who concluded that any bank they temporarily destabilised to the point where it needed government intervention would suffer a Fannie-type “rescue”. Mr Paulson's terms would slash the share price almost to zero and short-sellers would be richly rewarded, while long-term shareholders would be wiped out.

This is exactly what happened to Lehman Brothers and AIG this week. By Wednesday it was the turn of HBOS in Britain - and almost every other bank seemed vulnerable to similar attack. Mr Paulson had built a financial doomsday machine and then handed short-sellers the key.

What exactly happened on Thursday to stop this catastrophe?

On Thursday night governments took back the key to the doomsday machine. Short-selling, a perfectly legitimate activity going back to the Middle Ages, was temporarily outlawed in Britain and made almost impossible in the US. Nobody believes that the ban on short-selling will work for more than a few weeks, partly because there are ways round it but mainly because long-term investors are terrified of Fannie-style “rescues” if any bank suffers a temporary downgrade or loss.

The really good news yesterday morning was that Mr Paulson was not merely taking away the key to his doomsday machine, but planning to dismantle the entire contraption over the weekend. By Monday morning Washington is expected to announce a new institution, backed by unlimited government funding, to support the US banking system, probably by buying loans that are difficult to value properly and then sharing the losses (or gains) between the Treasury and banks. The exact mechanism is still unknown, but its objective is clear - to offer some temporary support not only to depositors and creditors, but also to shareholders, of struggling banks.

In Britain, too, the Government seems to have reconsidered its previous refusal to support bank shareholders. Lloyds TSB's rescue of HBOS would have been impossible without a sudden change of mind by the Bank of England. Its emergency mortgage funding facility, due for closure in October, was extended until January. And it seems almost certain that Lloyds TSB was given private assurances of further extensions - or some other form of government backstop financing for its HBOS takeover - for as long as required.

How will all these events affect the world's financial systems?

Assuming that events unfold as described above, fears of bank failures and financial panics should soon dissipate. Many banks will still disappear through mergers and millions of financial jobs will be lost around the world. Banks and bankers may never make as much money as they did in the past decade, but finance will remain one of the world's most profitable businesses, as it has been since time immemorial. In fact, eliminating competition should make the banks that survive more profitable, while hedge funds and private equity partnerships will become even more dominant in the riskiest - but potentially most profitable - trading businesses abandoned by traditional banks.

What will the financial mayhem do to the “real” economy of non-financial jobs, investment and consumer spending?

If banks are stabilised with government support, and then gradually slimmed down, the non-financial economy should suffer only a modest slowdown. In America, by contrast, an outright recession would be avoided if financial stability could be quickly restored. The worst of the housing slump there appears to be over, consumer confidence is rising and a gradual economic recovery should soon be under way. In Britain, further big job losses and falls in house prices, especially in London, because of the economy's dependence on the financial sector are likely. The recession, however, could still be a fairly mild one, assuming that financial stability is quickly restored.

Finally, what happens if the policy change on Thursday and Friday turns out to be an illusion? What if instead of destroying his doomsday machine this weekend, Mr Paulson turns it back on?

That isn't a question for economics but for science fiction.

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