A rogue trader, credit crisis and a warning to the world

So just because he says we are all doomed - as he has been saying in Davos this week - that does not necessarily mean the end of the world is nigh. But those from the great and good of the World's business and political elite who have gathered here at the world Economic Forum concede he has a point. The bankers may not like his message - but they find it hard to shoot down.

Harder still, in fact, after yesterday's news that a Nick Leeson-style rogue trader had lost Societé-Générale, the second largest French bank, an almost unbelievable £3.6 billion in bad bets in the markets. Ever since Leeson bust Barings 12 years ago, banks are supposed to have got on top of this sort of thing. They are supposed to know and understand risk. But here we go again. If they get this so wrong, why should we believe them on anything else?

It would be nice to think the world's bankers could be left to twist in the wind, paying the price for their mistakes, but the world does not work like that. The credit-crunch, which is beginning to squeeze the breathe out of the global economy, may be entirely caused by their greed and excess but everyone else will pay the price. There is probably no case in history where the banks have run out of money and the rest of the world has not been made to suffer and there is no reason to believe it will be different this time.

To function, capitalism needs credit and confidence. Both are in increasingly short supply - even in Davos, which is by definition a haven for those the world has treated well and who therefore have more reason than most to be optimists.

Of course most of the people here have seen financial crises before. Barclays' Bob Diamond can reel off a list of such crises over the past 25 years, from the Mexican and Asian meltdowns, to Long Term Capital Management and the dotcom bust. What is different this time? he asks. The world survived past financial crises and it will survive this one. At the time it always looks as if the world will end but it never has. These booms and busts are part of the system. He is probably right - but what is different this time is that it is much closer to the man in the street. The average voter probably never noticed the crises of Asia or Mexico and even the most recent dotcom bust passed most people by. Past crises and the recessions they caused obviously had an impact but it was felt most in the financial world and was more muted by the time it got through to the real economy. What's different this time, though, is that because of the house-price boom and the massive increase in personal indebtedness, everyone else has a more personal stake in the system. And the crisis of Northern Rock has opened their eyes to how close to home the problems are - and how hard they are to deal with. Put bluntly, if the banks run out of money it won't just be the local businesses which finds it harder to borrow. Easy credit is what has kept the housing market afloat too. Tighter credit means lower house prices. And this week - with stock markets crashing, the US authorities forced into panic measures and to cap it all a £3.6 billion rogue trader on the loose - the public at large has woken up to the fact that all is not as it should be.

They feel the chill in the air - and with good reason. America may be the cause of this crisis but its effects are being felt very close to home - everybody's home - and this of course has the potential to make things even worse. If consumers, for sensible defensive reasons, decide to rein in on their spending, then it will make fear of slowdown into reality.

Spending turns the wheels of the economy. Less spending means they turn more slowly. Much less spending means they stop altogether or go backwards.

What no one knows at this stage is just how bad it might be. There is now no one left arguing that the world is going to emerge unscathed. But there is considerable debate about whether America matters as much as it used to and has the same ability to infect the rest of the world with its viruses. In particular, people point to China and other Asian growth centres and argue that they have enough momentum, even if they slow down, to head off global recession. But in truth it is still too early to say. Though the stock markets are warning of trouble, it has not yet fed through into the mainstream economy. That it will is not really in doubt - but there is a big difference between growth being stunted and growth going into reverse.

There is, unfortunately, also reason to believe that however good or bad it is elsewhere, the UK is going to feel the worst of it. Again the reason is simple. The financial sector is already turning down fast and the UK economy is now a giant hedge fund with a huge bet on financial services - and no Plan B for when it all goes wrong.

For the past 10 years London has reaped rich rewards from the global financial boom and it will again in the future. But for now it looks like the day of reckoning. The main engine driving the UK economy is running on empty.

It may not last long, because the global economic system reajusts very rapidly these days but we had better brace ourselves for the sickening lurches. It is likely to be a bumpy ride for all of us. Arguably, that is the price you pay for capitalism.