The banking crisis began with a few mortgages irresponsibly mis-sold to borrowers in the United States who could not afford the repayments. It has cascaded to threaten the entire Western financial system, which is now beyond the power of financiers alone to rescue. Politicians must act.

Financial crises are dramatic because they are self-reinforcing. When lenders worry about repayment, they stop lending, even to each other.

This is why Ireland’s actions in the past 24 hours are almost as significant as the rejection by Congress on Monday of the Paulson plan: the Irish Government has guaranteed unconditionally all deposits in six Irish banks for two years. This is a recognition that the crisis will not be remedied just by increasing the amount of funds in the economy and cutting interest rates to encourage interbank lending. Governments must now do nothing less than rebuild shattered confidence in the financial system, and this task is as much about politics as economics.

The Irish decision is bold politics, but risky. It was made without international consultation, or much analysis of its potential effects on the global system. It creates the danger of a flood of deposits – and liabilities – for which Irish banks may not be prepared. And it is so sweeping in its scope, effectively nationalising the country’s financial system for two years, that confidence in the system now equates to confidence, or lack thereof, in Ireland’s national Government.

But the Irish move did underline the inadequacy of deposit insurance in the UK. The old limit of £35,000 was beginning to look like a signal that savers were taking risks by depositing money in the bank. That message needed to be refuted urgently after the nationalisation of Iceland’s third-largest bank; the massive aid extended to stricken banks in Germany and the Benelux markets; and the Bradford & Bingley rescue. Hence yesterday’s plans to increase the guarantee for bank deposits to £50,000. Hence, also, David Cameron’s speech yesterday supporting the idea of legislation to give the Bank of England new powers to rescue failing banks.

A new political consensus is needed urgently on both sides of the Atlantic that recognises the benefits but also the risks of globalisation, and accepts the need for a thorough overhaul of the machinery that manages that risk.

This crisis has shaken the foundations of capitalism. In the US the mechanisms of free and competitive markets, still sacrosanct two weeks ago, are being challenged by hundreds of congressional representatives, and millions of voters with the power to throw them out of office on November 4. These voters do not fall easily into red and blue camps. They are homeowners and business owners appalled by the devastation that remote financial institutions appear to have brought upon themselves, and by the Administration’s demand that taxpayers foot the bill.

The Paulson plan was, as President Bush noted, “a big plan for a big problem”. But like the sub-prime mortgages that made it necessary, it was disastrously mis-sold. Congress and the White House have a few days at most to put this right. They must explain to middle America precisely why an imploding global market in credit derivatives jeopardises mortgages, consumer loans and lines of credit for small businesses. They must reassure Main Street – again, for it did not work the first time – that its hard-earned tax dollars will not vanish into golden parachutes. And they must show that they are not exploiting the whole mess for political gain.

Governments must provide the regulatory framework for market economies. They must pump money into the system when it freezes. But they must also learn to tell voters what on earth they are doing.