Hamish McRae: How hard do you want to cane banks when the UK is running out of credit?

This one goes on and on, doesn't it? You think that the drama has reached the climax and then the script-writers create another and even more improbable scene. Hank Paulson dropping to his knees to plead with Nancy Pelosi to pass the bank rescue package? No, that would be just too ridiculous – the viewers would never believe it.

If the drama over the rescue seems overdone, it does at least remind us of the central role that the US still has in the global monetary system. What has gone wrong is a failure by American banks. That failure has consequences for the rest of us, because so much US debt is held abroad, but it is a problem that the US has to fix. It has to fix it for the sake of the US economy, so it is in America's self-interest to do some sort of deal. But the rest of the world reaps some of the benefit – or, if the rescue is badly botched, carries some of the cost.

That matters to us because the UK has a large international financial industry, but also because it is an unusually open economy and accordingly dependent on what happens in the rest of the world. This disruption will continue for some time yet, anything up to another 18 months.

The financial crisis is more protracted and more serious than most of us expected, and so even when normal business is resumed, it will be a new normality. Credit will be tighter. What is happening in our mortgage market will happen in the financial world more generally. It will be harder to borrow money.

That will change the profile of this economic downturn. While I still think it is not likely to be particularly deep, the path out will be slower and take longer. Plotted on a graph it will look more like a long but shallow U rather than a deep V.

As it happens, Goldman Sachs has just done a new paper on the likely profile of the recovery. That might seem a bit premature, even presumptuous, but the task of financial markets is to look through the period of disruption and pick out the developments beyond. Goldman's basic message is that the trough of the global economic cycle is six to nine months away – say the first quarter of next year. Remember, that is global; some countries will lag behind. This will make the profile of this cycle different to previous ones. Instead of plunging down then pulling up, the cycles for the 1990s and 2000s has been more of a slow slide in and, if Goldman is right, a slow climb out.

Why slow out? Simply because credit will be tight. Banks in the US and the eurozone have tightened their loan conditions on home loans and consumer credit. The US tightened first, towards the end of 2006, while eurozone banks started about a year later.

Does this suggest the US will climb out earlier than the rest of us? I don't think you can really say. So far it has been the eurozone economies that have been hardest hit, with Germany, France and Italy all reporting negative growth in the second quarter, when the US was still growing. Ireland, as noted below, has officially gone into recession. But the burden of housing and consumer debt is highest in the US (and UK) and that will hamper the recovery. The bar charts show the Goldman forecasts for growth this year and next for the main developed nations, with the UK and Italy having the weakest outlook.

Is Goldman right to be so gloomy about the UK? I should have thought the answer was probably yes, though I think the trough for our economy is likely to be well into next year, perhaps the third quarter, and the recovery in 2010 will be muted. Where I do agree with Goldman is that, viewed globally, this downturn will not be particularly deep. The real difference will be as a result of the change in credit conditions, the mood of "cash is king".

It is quite hard now to remember a world where credit was rationed as severely as it is now – and as it probably will be for some years. We are going back to a time when only the conventionally creditworthy were able to borrow. Start with individuals. The era of credit cards flooding through the letterbox is over. The tyranny of the postcode will burgeon. People who try to buy a home in streets where other residents have a bad credit record will find they need a larger deposit. People in insecure occupations, or rather occupations that are deemed insecure, will find it harder to borrow.

This will be reinforced by a trend already evident: a rise in the habit of saving. Part of this is forced in that if people cannot borrow, they have to save. But I think a psychological shift is also taking place, with people almost enjoying beating the pressures on them by simultaneously trying to maintain their quality of life but also rebuild their bank balances.

There are lots of bits of evidence of this, such as the fall in sales at upmarket John Lewis and the rise at downmarket Morrisons. Retail surveys are negative too. But the strongest evidence of this new austerity is in tax receipts: in August, VAT cash receipts were down year-on-year. This may mean people are simply spending less, but it may also be that they are buying necessities rather than luxuries. If you eat at home you don't pay VAT on the food, but if you eat out you do.

If the new austerity can be almost an enjoyable exercise for individuals in beating the system, for companies it will not be fun at all. There are many different levels that will be under pressure. For some small firms it is having overdraft limits cut back; for large ones is it having lumpy credit lines rolled over. The company sector as a whole is quite cash rich, but many individual firms are not. So the rules for successful financial management have gone back to those of previous periods of austerity. Cash flow has again become more important than profitability, because if you have cash in your account your bank will be beholden to you, not the other way round. This has an adverse effect on investment because that is the easiest thing to chop. We have seen what is happening to the 2012 plans for the Olympic site. These have to be cut back because the money simply isn't there.

There is a temptation to say this is unprecedented. That is wrong. The degree of disruption in US banking is undoubtedly greater than in previous post-war cycles, but the disruption of most aspects of the economy is less than it has been in any post-war cycle, at least so far. That economic disruption will grow in the coming months.

How bad things get will depend on the quality of the rescue operation. You never do these things well; the trick is to do them not too badly. I understand the desire of people on both sides of the Atlantic not to let the banks off the hook. That is fine. The trouble is that the harder the banks are caned, the less money they will have to lend. Do we really want to go back to a world where only the established middle- class in steady jobs have good enough credit records to get a mortgage?

The Irish recession: why Britons should look away now

It is a dubious honour for Ireland to become the first eurozone economy to go into recession. But the club membership will soon rise.

What makes it particularly interesting is that this follows an astounding success story – the fastest-growing economy in the developed world. That was, for those of us who love Ireland, an exhilarating period. But it brought strains, in particular those associated with a runaway property boom. Since Ireland had adopted the euro, it was unable to contain that boom by raising interest rates – not that the UK managed its boom very well either. The Irish property market turned down nine months ahead of the UK's but the effect has been more marked because construction was a much larger element of the economy. The question now is whether a flexible and inherently competitive economy can offset the drag from the property sector.

There are encouraging signs. One is that employment is still rising. So is unemployment as the workforce expands, but at 4.8 per cent the jobless rate is far below the double digits of the 1980s. Inward investment was the goose that laid the golden eggs, but that makes the Irish economy unusually dependent on manufactured exports to sustain growth.

From a British perspective there are at least three intriguing questions. One is what might have happened had the UK joined the euro? The Irish experience suggests the property boom might have been even harder to control. A second is the extent to which a low corporate tax rate, in Ireland's case 12.5 per cent, helps insulate a country from global pressures. I think the answer is that while it will help maintain inward investment, it may have made Ireland more vulnerable to swings in global demand.

And the third? How much does government revenue fall when an economy goes into recession? Ireland looks to be €7bn (£5.5bn) short this year. Multiply up to allow for economy size and convert to sterling and on my tally that would be equivalent to a £60bn shortfall for the UK. Ouch.

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