Adrian Hamilton: Forget the banks – it's the economy that matters now

The period of consumer-led growth is over. But what will the next engine of growth be?

So who's to blame for it all? Is it the bankers with their wild and wicked financial ways? Is it the hedge-fund managers intent on turning a quick buck whatever the cost to the victims? Is it the regulators, who failed to impose disciplines on their financial institutions, or the central banks who encouraged the borrowing spree by keeping interest rates too low for too long, or the politicians who happily gained the benefits of the longest sustained period of growth in a century without asking how it was all being paid for? Or indeed is it the fault of the consumers who all too easily grabbed at the loans being offered, confident that house prices would go on rising for ever?

Condemnation is a great comfort in times of crisis. Punishment too. One result of the collapse of Wall Street will be a string of lawsuits as US prosecutors seek to pin responsibility on individuals. Another will be vengeful group justice as the legislators and the regulators seek to bind the banks with hoops of iron, as much to inflict pain for the past as to prevent it happening again in the future.

It will be too late, of course, and probably wrong-headed. Revenge makes bad law in finance as in criminal justice. Even before a single new regulation has been introduced, the industry is changing shape. The spate of takeovers we are witnessing now with Lloyds TSB and HBOS, Bear Sterns and JP Morgan, the Bank of America and Merrill Lynch, are but part of a huge shake-up that will change the shape of banking, and the way it operates, with or without government intervention. To that extent the consequences of the bursting bubble are already in play.

The harder question now is what effect this will have on the international economy. For finance, after all, is a means of exchange, not an end in itself, despite the way in which bankers liked to pretend it was the very pinnacle of power expression, forgetting that it was other people's money they were playing with.

It doesn't really matter whether you regard banks as the primary culprits for our present woes or merely the excrescence of a market-obsessed economy that had got out of hand, the reality is that you can't disentangle the explosion in exotic financial instruments from the general conditions of excess liquidity and burgeoning consumer debt that have fuelled the economic growth of the past 15 years. "Greed is good" is what it has been all about at all levels, bar none.

Now you don't have to subscribe to the wilder vision of a world retreating to the sober borrowing and lending conditions of some distant, mythological past to see that a banking crisis at this moment when economies are contracting could make things infinitely worse. More important, it could also make the recovery from recession that much slower and more difficult.

Yes, the period of untrammelled consumer-led growth is over. And a good thing too, say some. But where does the next engine of growth come from?. The problem of the present slide is that it is dragging everyone with it. China, the US, Europe, Russia and even Latin America are all pulling in their horns at the same moment. Even those with money, like the sovereign funds of the oil-rich countries and China and India, will now be reluctant to stretch out abroad given the risks.

The current fall in the price of commodities will help. So will the continuation of relatively low interest rates. But for real growth you still need investment, and for investment you need money and the mediums of money. A period of correction is all very well. Indeed you could argue that all that is happening now is a classic rhythm of a time of excess being succeeded by a time of retrenchment, that we have spent to day what we ought to have waited until tomorrow for and have to suffer in consequence.

But moral theory butters no parsnips. We need a policy for practical revival and for that we need politicians to start thinking for the future and co-ordinating their actions. A solution o the banking crisis is already in train. There will be further collapses and mergers. But that may be no bad thing. There will be new rules for lending, which are fine if they're carefully directed.

Governments are bound to get more involved, if only because this affects votes. Why, after all did the US authorities save AIG but not Lehman Brothers, and why did Gordon Brown take a direct part in the HBOS rescue, if it was not because these institutions involved the public as customers in a way that investment banks do not. But this crisis is now moving from finance to the economy, and that is where we need to concentrate our sights.

a.hamilton@independent co.uk