Investors have been let down by the watchdogs

But any cursory visit like the one I made to attend a wedding near Reykjavik in May this year would have told them they were mad and stupid.

The groom was from the City and several well-known City folk were present. None of us had been to Iceland before. As we travelled to our hotel, we looked at each other in amazement. We were laughing. Put simply, the country is an almighty con.

The idea that this sparsely populated island had an economy capable of underwriting its banks' deposits was absurd. It was as if a massive joke was being played on London and the rest of the financial world.

This was May and already, investors around the globe had woken up to the reality of this lump of lava in the northern sea and were getting out. Local interest rates were shooting up, to 15 per cent, and the krona had fallen 20 per cent.

Sure enough, there was the chief economist of the Icelandic Central Bank, Arnor Sighvatsson, warning: "We're moving on very dangerous economic terrain. It causes enormous problems to have such a big financial sector relative to the size of the economy."

Five months on and few people are smiling. On Saturday, a friend who has made a fair amount of money down the years, rang me. "I've got money in Icesave, what should I do?" Why? "Because they offered 2 per cent more than anyone else." Listen, I said, while you're on the phone to me, get it out.

The oldest City adage of all is that if anything is too good to be true it usually is and that is certainly the case where Iceland is concerned. But equally, human nature never ceases to amaze.

Even putting aside the fact that anyone might wonder how this tiny nation could repay everyone's cash, there were red danger signals flashing all over and yet my friend, who reads news-papers, had ignored them.

He chose instead to concentrate on the prospect of a bit extra. In this, he was not alone. Town halls, businesses and private savers had all done the same.

Anyone giving it a moment's thought would have queried how Iceland had the means to guarantee the deposits of its buccaneering banks: Landsbanki, Kaupthing and Glitnir.

It's easy to criticise their customers. This is hardly the first instance of investors believing the hype and losing. Neither is local government facing gaping losses caused by financial recklessness a new phenomenon.

Twenty-eight councils had accounts with BCCI that perished. In 1988, Hammersmith & Fulham had 0.5 per cent of the entire world market in interest rate swaps and ended up squandering a fortune. More recently, councils have emerged as being among the clients of notoriously risky hedge funds.

So Iceland joins the list of other disasters, where greed has stifled common sense. But that isn't true. There was no reason for savers to examine Iceland's books or fly to Rejkyavik to see for themselves. In theory, the ratings agencies and regulators had done it for them.

This is the real scandal with Iceland not that public bodies and other savers pumped their cash into a nowhere place but that the people they trusted to tell them otherwise did not do their jobs properly.

Much of the Icelandic banks' activities in the UK fell under the aegis of the Financial Services Authority. Even if technically they did not, the banks had offices here and the percepetion was that they were fine and dandy. In the case of the public organisations, the Treasury, too, did not tell them to desist.

The international credit-rating agencies Moody's, Standard & Poor's and Fitch all gave them a clean bill of health, not most recently but at the time when the councils and the rest were handing over their deposits. What they chose to alight upon was the balance sheets of the banks. What they totally disregarded was the wherewithal of the Icelandic government to step in and bail them out should they fail.

This crisis is littered with examples of other models that fall apart upon investigation. On Northern Rock, the bank's business plan was entirely dependent on the continuing liquidity of the international money markets yet the risk of this source of supply being cut off seemingly did not form part of any risk assessment (if it had, surely the FSA would have told the Newcastle bank to lessen its exposure).

Similarly, nobody was bothered that Bradford & Bingley was also behaving in a cavalier fashion, ploughing into buy-to-let and extending loans on the say-so of borrowers as to what they earned. Such an approach was foolhardy in the extreme it did not require a genius to question what would happen if buy-to-lets crashed.

There is a marked attitude of those in government when confronting the credit crunch to heap opprobrium upon the bankers. There's no doubt in several cases it's deserved. Similarly, there is a tendency to blame the customers that they borrowed too much and were greedy for more credit or higher returns. That's also true.

But there is also a lack of any loud admission that our rating and regulatory system has failed. All the current talk from ministers and officials is of fighting the raging fires. What they are not prepared to address is how the banks came to burn and who provided the matches.

When all this is over, it's no use those at the Treasury, Bank of England and FSA merely congratulating each other on a rescue well done. There needs to be a complete examination of how banks like these were allowed to operate, how they were ever given AAA ratings, why their books were not taken apart line by line.

In Iceland's case, there needs to be an investigation of how it was that the authorities and agencies imagined the small fishng nation could sustain the growth of its three banks.

"Never again" must be the lesson of this drama not just in relation to the bankers and their bonuses, where the Government is choosing to concentrate its fire, but on the patently inadequate structure that allowed some banks to operate in the way they did.

Yes, mock the councils and the other savers who thought Iceland was a safe haven but nobody told them any different and that is where the blame truly lies.