Despite the blizzard of billions aimed at saving the world banking system last week, homeowners and small businesses everywhere are wondering what the future now holds for them. Gordon Lennox of Lennox Estates, one of the many small businesses that reaped the benefits of the Celtic tiger and the property boom in particular, has just laid off two employees from his offices in Bray and Dalkey.

“Even in the 1980s, we didn’t have to let people go. In previous recessions, the volume of house sales dropped by 20% and prices dropped by a similar percentage but now it’s as if the banks have pulled down the shutters and closed up shop,” he said.

Lennox said that while sales had dried up, the cost of overheads was at a record high. Instead of waiting for the market to rally, Lennox, who has been selling houses since the early 1970s, is focusing now on routine professional services such as rent reviews, house valuations and compulsory purchase orders. “I’m hoping for more builders to cut the prices of new homes to stimulate the market. And more interest rate cuts,” he added.

The financial meltdown that started on Wall Street and spread like a virus around the world has become frighteningly personal. As markets collapse, even the banks running the cash machines we take for granted are tottering under the onslaught.

By Friday, shares in Bank of Ireland had fallen by 48.45% in a week and 82% from their 12-month high. The story was similar at AIB, down 43.5% on the week and 77% from its 12-month high.

Almost two weeks ago the Irish government sought to boost banking confidence by unveiling a €400 billion plan to guarantee six domestically-owned financial institutions. As last week’s market panic showed, the move did nothing to impress investors.

Last week it was Britain’s turn to act. As shares in financial giants such as Royal Bank of Scotland (RBS) tumbled to new lows, the British government stepped in to quell mass panic among savers with a gigantic rescue package that puts up to £400 billion (€504 billion) of taxpayers’ money on the line. That equates to £6,600 for every person in the UK.

Yet on Friday stock markets plunged again, slicing more billions off people’s investments and pensions. In Dublin the Iseq index of leading shares ended at 2,871, down over 27% on the week and 66% off its 12-month high. In London the FTSE 100 index ended at 3,932; a year ago it was at 6,751. In the US, the Dow Jones index fell to 8,451; a year ago it was at 14,118.

A desperate downward spiral, fuelled by fear that other huge dislocations still lurk in the global financial system, was taking hold.

“We can solve this crisis and we will,” President George W Bush said as finance ministers from around the world gathered in Washington and tried to formulate salvation. Yesterday they came up with a one- page statement. “The G7 agrees today that the current situation calls for urgent and exceptional action,” it read. “We commit to continue working together to stabilise financial markets and restore the flow of credit, to support global economic growth.”

Big deal, said many. In the face of the greatest financial panic for decades, they were hoping for firm proposals, not platitudes. Every week in this crisis seems to bring a bigger bailout. Every week leaders say the worst is over. Every week another downturn strikes.

Is there no end in sight? How tough is it going to get?

Last Monday, before the latest turmoil erupted, members of the British House of Commons Treasury select committee were in Japan seeking to learn from its experience of financial crisis 20 years ago. Through the 1980s, share and property prices in Japan had roared and soared, with the Nikkei stock market index peaking at just under 39,000.

After the bubble burst in 1989, the Nikkei fell by 80%, finally bottoming out in 2003 at just over 7,600. Property prices crashed. For years the economy stagnated and the stock market never fully recovered.

Japanese officials were keen to explain why the sclerosis has persisted so long. One big problem, they said, was the banks. Their primary instinct is self-preservation, not each other, nor the national interest. So they are slow to admit the full scale of their losses, which holds everything else back. Only government action eventually forces the issue.

“The Japanese told us that Britain will have to nationalise not just a few banks — that would be just the first step,” says Michael Fallon, the deputy chairman of the Treasury committee. “They told us that we would have to nationalise the entire banking system.”

It seemed fantastical. At the beginning of last week few thought that the UK, home to some of the world’s largest private banks, would have to resort to such drastic measures. Yet events in financial markets were moving so fast that within days the government had to act on a previously unimaginable scale.

Reports that bank chiefs had met Alistair Darling, the chancellor, on Monday night sparked panic in the stock market. In a few hours on Tuesday, some banks’ values plunged by 30% or 40% as investors sold, suspecting huge new losses among banks were looming.

A run on the banks was once again close to erupting. It threatened to throw the entire system into chaos.

In Downing Street Brown and his chancellor, Alastair Darling, hastily met Mervyn King, the governor of the Bank of England and other officials. With the help of £245 worth of take-away curry, they and their advisers worked into the early hours of Wednesday morning to hammer out a rescue.

Early on Wednesday morning, Darling announced the British government was offering to inject £50 billion into the banks as new capital — effectively taking a stake in them to shore up their financial bases.

In addition, he offered to guarantee £250 billion of new loans made by the banks — to try to encourage them to resume normal business. He also offered £100 billion to try to ease the lack of “liquidity” — readily available money — in the banking system.

At first, Brown and Darling seemed to have pulled off a remarkable coup. As he and his new National Economic Council gathered in the “Cobra” emergency meeting room in Whitehall, financial markets were delivering their judgement on his rescue plan.

The FTSE 100 was down. Not good. But shares in HBOS and RBS, the two banks most in need of rescuing, were rising. Perhaps Brown, who had also co-ordinated a 0.5% cut in interest rates, had done enough to steady the City’s jittery nerves.

After months of dismal ratings, Brown had found his poise again. A YouGov poll for the Sunday Times this weekend shows Brown’s personal rating has shot up and that the Tory lead over Labour has almost halved in the past month from 19% to 10%.

He and Darling had come up with a better plan than any other government so far. For weeks independent experts had advocated that the best way of tackling the crisis, rather than piecemeal firefighting, was to stage a widespread injection of new money into the banks.

Brown was further bolstered when the US changed tack to follow the British lead. The original US government rescue had envisaged buying up “toxic assets” — duff loans and other loss-incurring instruments — from the banks. It would help, but it would not rebuild the banks’ foundations.

So last week the US authorities decided they too would inject capital directly into banks, taking some sort of stakes in return. Such state intervention is anathema to many in the land of free enterprise, but nothing else seemed to be working. This didn’t have the desired effect, either. Markets tanked again. Investors baled out, screens turned red, and fear and irrationality ruled again.

“Everyone is in a state of funk,” said Charles Goodhart, professor of financial markets at the London School of Economics. “There is panic in the air. People have suddenly realised we are going into a recession.”

Goodhart remains relatively optimistic, pointing out that Britain faced a worse stock-market crash and economic turmoil in the 1970s, yet recovered to prosper. The danger is that the banking crisis now threatens to intensify the economic downturn, he says.

As more individuals and businesses suffer, that again hurts the financial institutions, whose instinct is to tighten credit even further. It’s a vicious vortex.

Nouriel Roubini, a US economist who has done better than most at predicting the course of the meltdown, fears we are now close to being too late to stop it wreaking havoc. “Corporate defaults will surge during the recession,” he predicts. Huge US companies such as Ford, General Motors an Chrysler are already struggling. That will in turn mean that “massive losses will occur among the credit default swaps that provided protection against corporate defaults”.

Credit default swaps (CDSs), which are unregulated complex financial instruments, are another bubble, having grown in little over a decade into a market estimated at more than £50 trillion. They insure against losses when credit deals turn bad, and financial companies used them to rake in fees or boost assets on the way up. On the way down, however, their value evaporates if parties to them cannot pay up. On Friday credit derivatives linked to Lehman Brothers, the failed US bank, were being valued at less than 9 cents per dollar of notional worth.

The losses can spread far through the system. Their destructive power has already forced a government rescue of AIG, a giant insurance company, and stock markets fear worse could be to come.

How supposedly safe insurance systems can suddenly unravel is also being played out on a national scale with the collapse of Iceland’s main banks. After expanding aggressively, the banks amassed liabilities dwarfing Iceland’s €15 billion economy. When the banks collapsed last week, a bitter argument erupted over who should — and could — compensate whom.

This illustrates a point that might yet strongly influence the course of the crisis. For all that governments are trying to co-operate, even countries tend to fall back on self-preservation. “You should never expect too much of the co-ordinated stuff,” said Goodhart. “In these circumstances the power still lies with the nation state. They have the capacity to tax, therefore they have the capacity to get money and can control resources. “You can dress it up as wonderful international co-ordination, and that’s fine. But effectively what happens is every country in a panic looks after its own.”

And that will make the meltdown more political than ever.

Just as in America, the crisis is sparking a public backlash everywhere as people vent their fury about having to bail out rich bankers. Perhaps more importantly, it’s an issue of economics as well as fairness. As Robert Reich, an economist and former US labour secretary, points out, one cause of the sub-prime mortgage crisis lies in the fall in ordinary incomes in America while those at the top rose sharply.

The issue is swinging the looming US election the way of Barack Obama, the Democrat candidate who has campaigned for a better deal for middle America. Polls now put his support at 49% compared with 43% for John McCain, the Republican candidate.

Whatever happens politically, however, the imbalances might start to correct themselves. The Centre for Economics and Business Research estimates 62,000 City workers are going to lose their jobs in two years, and that bonuses paid in the next two years will be between 60% and 70% lower than in 2006 and 2007.

In addition, governments are going to have to take a more intrusive role, including tougher regulation, to solve the crisis, say experts such as Willem Buiter, professor of European political economy in the European Institute at the London School of Economics.

Jeffrey Sachs, director of the Earth Institute at Columbia University and a leading international economist, told The Sunday Times that he believes the US and UK are heading for recession and that there is a serious risk that it may spread worldwide, because “the sense of panic and gloom is deep, and the amount of financial correction is very, very large”. But he believes it won’t be Armageddon.

“Are we going to have a recovery after a downturn? I would say yes. Can we avoid catastrophe? I would say yes. Is it frightening right now? Obviously, the answer is also yes.”

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