Spain, Germany and France yesterday followed Britain in bailing out their banks. Russia halted stock trading. Iceland seemed to soften its opposition to EU membership. When government is the only port in the storm, what does this say about free markets? The short, and not terribly comforting, answer is that boom-and-bust is an inherent feature of free-market capitalism. The current financial crisis is only the latest in a series stretching over a century.

That will bring scant consolation to the prudent, who have seen their savings plummet as interest rates and share prices fall, and who now suffer the added insult of having their taxes used to rescue the profligate. The £37 billion that the Government is spending to recapitalise Royal Bank of Scotland, Lloyds TSB and HBOS is taxpayers' money that cannot now be spent on schools or hospitals.

In principle, taxpayers should get most of their money back when bank shares recover. But taxes may have to rise in the meantime, further punishing those people who never aspired to be super-rich, and who distrusted the super-reckless. A recession will bring them a nightmare of job insecurity and more marital breakdown, domestic violence and crime. A recession may have a statistical definition - two consecutive quarters of negative growth - but it has an emotional impact on tens of millions of lives.

The bank heads, board directors and non-executive directors who brought our financial system to the brink should stand ashamed of their failures. They need to do more to explain themselves, both their mistakes and the mistaken criticisms of them. (Blanket bans on bonuses, for example, may work as an act of public retribution against bankers, but they will not reform reckless institutional appetite for risk; bankers need to say as much.)

But their mistakes do not mean that capitalism is the wrong way to organise our economy. The pursuit of profit by privately owned businesses is still the best method yet devised to create wealth and opportunity for the many. Capitalism has lifted hundreds of millions of people out of poverty and has provided unprecedented choice, material and intellectual. It has provided the backdrop for greater tolerance and understanding.

Greater transparency and global supervision are needed. The financial markets were regulated; but their complexity left regulators staring at corners of the jigsaw when they should have been piecing together the picture on the box.

Can the State save capitalism from itself? The Government's approach is instructive. Yesterday's intervention gave the Treasury a controlling stake in RBS. In return, ministers have demanded an end to bonuses and dividends for this year. But the bank will still be run for profit, with private investment. Nationalisation is only partial, and is clearly intended to be temporary, to try to prevent recession becoming depression. Nonetheless, its behaviour in government ownership will be the ultimate test. The Prime Minister is now the ultimate paymaster of institutions that are responsible for a substantial share of British mortgages and deposits. The measure of the rescue will not just be a short-term restoration of confidence, but evidence that the banks' behaviour is not perverted or politicised in years to come.

Policymakers who thought that they had abolished boom-and-bust have had a brutal shock. But the greed of one group has not fatally compromised the entire economic system. It is the many well-run businesses remaining that will return us to prosperity. Capitalism has faltered. But it could emerge the stronger, if prudence goes from being a political slogan to a watchword in the private sector.