Comment: credit crunch will hit us hard

The banking industry admits that remuneration policies and defects in capital adequacy rules encouraged a worldwide explosion in financial innovation which went too far. Here, the taxpayer must pick up the bill, in the form of the Northern Rock rescue and further Bank of England intervention. The banking supervision system set up by Gordon Brown in 1997 failed its first big test over Northern Rock. And it is clear that instead of congratulating itself on the vast contributions of the City to the corporation tax haul, and relying on consumer borrowing to boost growth, the Treasury should have been preparing for the contraction of mortgage lending now under way. The economy outside financial services may hold up, with exports helped by a weaker pound - but not if business lending is affected and job losses follow.

While the credit crunch is driven largely by market forces beyond government control, the Prime Minister's ability to mitigate its effects is limited because his borrowing is already too high. Whereas the US has been able to make tax cuts to help consumers, here Parliamentary Private Secretary Angela Smith almost resigned because the 10p tax rate for the poorest is being abolished. The Government's profligacy in spending after initial years of prudence means its finances are too weak to permit much action. As for further interest rates cuts, the Bank's Monetary Policy Committee cannot oblige on the scale borrowers would like, because of inflationary pressures from world food and energy prices.

Today Mr Brown's closest ally Ed Balls criticises the "indulgent nonsense" of leadership speculation and defeatism - but this will continue to undermine Labour activists' morale ahead of the local and London elections. Mr Brown is paying a high price for past profligacy.