Keynes observed that “markets can remain irrational longer than you can remain solvent”. Irrationality, combined with uncertainty, casts a long shadow this weekend. Why were American banks so keen to lend so much in sub-prime mortgages to “Ninja” borrowers (no income, no job, no assets) when only a fool could have expected the ultra-low interest rates of a few years ago to last? Why, compounding that folly, was a pyramid of financial instruments built on the foundations of those dodgy loans?

A few years ago, after the Enron and World-Com scandals, America tightened up on board-room excesses and perhaps went too far. Now we can expect a stream of mortgage lenders and investment banks on Capitol Hill, expressing penitence for their errors, before the inevitable clampdown. There is much to admire in vibrant American capitalism but the system is prone to locking the stable door after the horse has bolted.

The crisis in financial markets is a test for those whose job it is to ensure financial stability. Ben Bernanke, who stepped into Alan Greenspan’s big shoes as chairman of the US Federal Reserve only last year, made an assured move on Friday in cutting the rate at which the central bank lends to the market — the discount rate — by half a percentage point. There will be those who say central bankers should make investors pay for their stupidity and remain aloof during periods of extreme turbulence. That “moral hazard” charge will grow louder if there are general cuts in interest rates by central banks in the coming months.

The criticism ignores two essential points. The first is that it is too late to save some mortgage lenders and investors from themselves. Losses have been incurred and some institutions and hedge funds will be forced to close. This is as it should be, a necessary cleansing process. Second, financial crises require action when it becomes clear that they will have real economic effects. That was Mr Bernanke’s fear. The same considerations will inform any decisions by Mervyn King and his monetary policy committee at the Bank of England in the coming months.

Nobody can say with certainty how the crisis in the markets will be resolved. The worst of the storm may be over and things may settle, but it would be prudent to assume that there are horrors yet to emerge. As Warren Buffett, the legendary US investor, put it: “It’s only when the tide goes out that you learn who’s been swimming naked.” Either way, something has changed. The days of apparently risk-free, easy credit are over.

All this may seem a long way from the warp and weft of Britain’s economy and the everyday concerns of voters. But it could matter a lot. Gordon Brown did many things right as chancellor, most notably granting independence to the Bank of England, but a large part of his economic success was built on easy credit and the flexible economy that Labour inherited from the Conservatives. In a benign global economic environment, Mr Brown was able to wrap the country in red tape, ramp up government spending and get away with it.

Times may be changing. The governor of the Bank of England has been warning for some time that the “nice” decade may be over. Tougher times demand tougher responses. Alistair Darling, the chancellor, will have the task of managing a sharp slowdown in public spending. John Redwood, with his proposals for the Conservatives’ economic competitiveness policy group, has thrown down the gauntlet of returning Britain to the low-tax, lightly regulated economy of a decade ago.

Some of the details of Mr Redwood’s individual proposals can be questioned. Whether they mesh with David Cameron’s other proposals is a matter of debate. But the core vision, that Britain needs a smaller state and less red tape, is the right one. In what may be more challenging times, it offers the best way forward for the Conservative party and the country.